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Modification and remeasurement of a lease

The following table summarizes information pertinent to the lease remeasurement.

Remeasurement date January 1, 20X3

Lessee Corp’s incremental borrowing rate on
January 1, 20X3 3%

Right-of-use asset immediately before the
remeasurement $272,757

Lease liability immediately before the
remeasurement $285,941

How would Lessee Corp account for the remeasurement?

Analysis

Balance sheet impact

To remeasure the lease liability, Lessee Corp would first calculate the present value of the future lease
payments for the lease term plus the purchase option (using the updated discount rate of 3%, which
includes the assumed exercise of the purchase option and a term of 3 years (i.e., the remaining term of
the lease). The following table shows the future lease payments including the payment of $30,000 at
the end of the original lease term to exercise the purchase option. As shown in the table, the revised
lease liability would be $318,801.

Purchase
Year 3 lease Year 4 lease Year 5 lease option
payment payment payment payment Total

Lease
payment $100,000 $100,000 $100,000 $30,000 $330,000

Discount 0 2,913 5,740 2,546 11,199

Present
value $100,000 $97,087 $94,260 $27,454 $318,801

To calculate the adjustment to the lease liability, Lessee Corp would compare the recalculated and
original lease liability balances on the remeasurement date.

Revised lease liability $318,801

Original lease liability 285,941

$32,860

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