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Modification and remeasurement of a lease
Lessee Corp would record the following journal entry to adjust the lease liability.
Dr. Right-of-use asset $32,860
Cr. Lease liability $32,860
Income statement impact
Lessee Corp would calculate the interest expense (based on discount rate of 3%) on the lease liability
from the remeasurement date as follows.
Remaining cash Annual lease Liability balance after Interest
Year payments payment annual payment expense
3 $330,000 $100,000 $218,801 $6,564
4 $230,000 $100,000 $125,365 $3,760
5 $130,000 $100,000 $29,126 $874
The revised straight-line amortization should be recalculated as shown in the following table.
Right-of-use asset immediately before the remeasurement $272,757
Adjustment to the right-of-use asset 32,860
Adjusted right-of-use asset balance $305,617
Remaining economic life at the remeasurement date* 4 years
Recalculated annual right-of-use asset amortization $76,404
*Remaining economic life of the asset is used as opposed to remaining lease term because it is assumed that the purchase
option will be exercised.
EXAMPLE 5-4
Remeasurement of a finance lease for a change in the probability of payment for a residual value
guarantee - lease classification not required to be reassessed
On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease manufacturing
equipment.
The lease has the following terms:
Lease commencement date January 1, 20X1
Lease term 5 years with no renewal option
Economic life of the equipment 6 years
5-17
