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Accounting for leases

Example 4-11 illustrates the subsequent measurement of a right-of-use asset and lease liability.

EXAMPLE 4-11

Finance lease subsequent measurement and recognition – non-specialized digital imaging equipment
lease (lessee)

This example is a continuation of Example 4-2.

The lease is classified as a finance lease as the lease payments represent substantially all of the fair
value of the asset. The right-of-use asset is $4,825 and lease liability is $3,725.

How would Lessee Corp measure the right-of-use asset and lease liability over the lease term?

Analysis

Lessee Corp would amortize the right-of-use asset on a straight-line basis over the lease term because
the economic life is greater than the lease term.

Amortization Right-of-use asset

Lease commencement $4,825

Year 1 $965 3,860

Year 2 965 2,895

Year 3 965 1,930

Year 4 965 965

Year 5 965 0

$4,825

Interest expense on the lease liability would be calculated using a rate of 7%, the same discount rate
used to initially measure the lease liability. The lease liability would change as follows (assuming
beginning of year payments):

Lease
liability
Principal Interest Interest (end of
Payment paid paid expense year)

Lease commencement $3,725

Year 1 * $261 3,986

Year 2 1,100 839 261 202 3,088

4-29