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Modification and remeasurement of a lease

Annual lease payments $100,000

Payment date Annually on January 1

Lessee Corp has guaranteed that the residual value of the manufacturing equipment will be at least
$15,000 at the end of the lease term.

Lessee Corp determines that the lease is a finance lease. Lessee Corp’s incremental borrowing rate at
the lease inception date is 5%.

At the lease commencement date, it was not probable that Lessee Corp would make a payment under
the residual value guarantee. On January 1, 20X3, a change in technology made the technology in the
leased equipment outdated. As a result, Lessee Corp now expects a decline in the fair value of the
equipment and at the end of the lease term, payment of $10,000 is probable under the residual value
guarantee. Since Lessee Corp now determines that it is probable that it will have to make a payment
under the residual value guarantee, it is required to remeasure the lease on the date of the change in
the amount probable of being paid (January 1, 20X3).

Lessee Corp does not need to reassesses the lease classification based on the guidance in ASC 842-10-
25-1.

The following table summarizes information pertinent to the lease remeasurement.

Remeasurement date January 1, 20X3

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 (using the discount rate of 5% determined at lease commencement) plus
the residual value guarantee. The following table shows the future lease payments, including the
payment of $10,000 at the end of year 5 for the residual value guarantee. As shown in the table, the
revised lease liability would be $294,579.

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