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Modification and remeasurement of a lease

Reassess lease classification based on the terms of the modified lease

Lessor Corp would classify the modified lease as an operating lease because it does not meet any of the
criteria to be classified as a sales-type lease or as a direct financing lease.

Account for the modified lease

Lessor Corp would recognize the lease payments to be received under the modified lease, net of its
accrued rent asset balance immediately before the modification, on a straight-line basis over the
remaining five-year lease term as shown below.

1/1/X4 $507,000

1/1/X5 507,000

1/1/X6 509,000

1/1/X7 509,000

1/1/X8 509,000

Total payments $2,541,000

Less: accrued rent asset ($8,000)

Net payments $2,533,000

Lessor Corp would recognize annual straight-line income of $506,600 ($2,533,000 ÷ 5 years).

EXAMPLE 5-14

Modification of an operating lease that changes lease classification to a sales-type lease
On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease non-specialized
digital imaging equipment.
The following table summarizes information about the lease and the leased assets at lease inception.

Lease commencement date January 1, 20X1

Initial lease term 5 years, no renewal option

Purchase option None

Annual lease payments $150,000 in the first year with a
4% increase each year thereafter

Payment date Annually on January 1

Economic life of the leased asset 10 years

Carrying value and fair value of the equipment at lease inception $1,300,000

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