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Modification and remeasurement of a lease
How would Lessee Corp account for the lease modification?
Analysis
Lessee Corp would remeasure the lease as of the modification date.
Balance sheet impact
Lessee Corp would remeasure the lease liability on the date of the modification by calculating the
present value of the remaining future lease payments for the modified lease term using Lessee Corp’s
current discount rate of 4%. The modified lease liability would be $176,538, as shown in the table
below.
Year 4 Year 5 Total
Lease payment $90,000 $90,000 $180,000
Discount 0 3,462 3,462
Present value $90,000 $86,538 $176,538
To calculate the adjustment to the lease liability Lessee Corp would compare the recalculated and
original lease liability balances on the modification date.
Revised lease liability $176,538
Original lease liability 195,238
($18,700)
Lessee Corp should record the following journal entry to adjust the lease liability.
Dr. Lease liability $18,700
Cr. Right-of-use asset $18,700
Income statement impact
The single lease expense should be calculated as illustrated in Example 5-5.
EXAMPLE 5-8
Accounting for a modified finance lease – lease classification changes to an operating lease
On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease manufacturing
equipment.
5-25
