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Modification and remeasurement of a lease
The following table summarizes information pertinent to the lease modification.
Modification date January 1, 20X4
Modified annual lease payments $110,000
Lessee Corp’s incremental borrowing rate on
January 1, 20X4 6%
Right-of-use asset immediately before the modification $199,238
Lease liability immediately before the modification $195,238
How would Lessee Corp account for the lease modification?
Analysis
Balance sheet impact
The lease liability is remeasured by calculating the present value of the remaining future lease
payments for the modified lease term using Lessee Corp’s current discount rate of 6%. The modified
lease has five years remaining (two years remaining in the initial term plus three years added with the
modification). The modified lease liability would be $491,162 as shown in the table below.
Year 4 Year 5 Year 6 Year 7 Year 8 Total
Lease
payment $110,000 $110,000 $110,000 $110,000 $110,000 $550,000
Discount 0 6,226 12,100 17,642 22,870 58,838
Present value $110,000 $103,774 $97,900 $92,358 $87,130 $491,162
To calculate the adjustment to the lease liability, Lessee Corp would compare the recalculated and
original lease liability balance on the modification date.
Revised lease liability $491,162
Original lease liability 195,238
$295,924
Lessee Corp would record the following journal entry to adjust the lease liability.
Dr. Right-of-use asset $295,924
Cr. Lease liability $295,924
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