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Modification and remeasurement of a lease

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 8,638

Adjusted right-of-use asset balance $281,395

Remaining lease term at the remeasurement date 3 years

Recalculated annual right-of-use asset amortization $93,798

EXAMPLE 5-5

Accounting for a modified operating lease that extends the lease term - no change to lease
classification

On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease property to be used
as a retail store.

The lease has the following terms:

Lease commencement date January 1, 20X1

Initial lease term 5 years with no renewal option

Annual lease payments $100,000

Payment date Annually on January 1

Initial direct costs $10,000

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

On January 1, 20X4, Lessee Corp and Lessor Corp amend the original lease contract to extend the
term of the lease for an additional three years. As the modification does not grant an additional right
of use, Lessee Corp concludes that the modification is not a separate new lease, but rather that it
should reassess and remeasure the entire modified lease on the effective date of the modification.

Lessee Corp reassesses the lease classification and determines that it should still be classified as an
operating lease upon modification.

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