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FINANCIAL REPORTING

the initial direct costs are more narrowly defined had more time to prepare for implementation of
under Topic 842. Specifically, such costs include Topic 842, it is important for them to be keenly
only the incremental costs that would not have aware of its nuances — such as those addressed in
been incurred had the lessee not entered into the the example we supplied — and to learn from the
agreement. issues faced by those public entities that transi-
While nonpublic entities may have initially tioned earlier. ■

Expense and amortization schedule

Lease liability Lease liability Lease Right-of-use Right-of-use Total
Cash
Year interest principal liability asset asset lease
payments
expense reduction balance sheet amortization balance sheet expense
0 $14,048,925 $14,198,925
1 $1,000,000 $702,446 $297,554 $13,751,371 $465,304 $13,733,621 $1,167,750

2 $1,000,000 $687,569 $312,431 $13,438,940 $480,181 $13,253,440 $1,167,750
3 $1,000,000 $671,947 $328,053 $13,110,887 $495,803 $12,757,637 $1,167,750
4 $1,000,000 $655,544 $344,456 $12,766,431 $512,206 $12,245,431 $1,167,750

5 $1,000,000 $638,322 $361,678 $12,404,753 $529,428 $11,716,003 $1,167,750
6 $1,100,000 $620,238 $479,762 $11,924,990 $547,512 $11,168,490 $1,167,750
7 $1,100,000 $596,250 $503,750 $11,421,240 $571,500 $10,596,990 $1,167,750

8 $1,100,000 $571,062 $528,938 $10,892,302 $596,688 $10,000,302 $1,167,750
9 $1,100,000 $544,615 $555,385 $10,336,917 $623,135 $9,377,167 $1,167,750

10 $1,100,000 $516,846 $583,154 $9,753,763 $650,904 $8,726,263 $1,167,750
11 $1,210,000 $487,688 $722,312 $9,031,451 $680,062 $8,046,201 $1,167,750
12 $1,210,000 $451,573 $758,427 $8,273,023 $716,177 $7,330,023 $1,167,750

13 $1,210,000 $413,651 $796,349 $7,476,675 $754,099 $6,575,925 $1,167,750
14 $1,210,000 $373,834 $836,166 $6,640,508 $793,916 $5,782,008 $1,167,750

15 $1,210,000 $332,025 $877,975 $5,762,534 $835,725 $4,946,284 $1,167,750
16 $1,331,000 $288,127 $1,042,873 $4,719,660 $879,623 $4,066,660 $1,167,750
17 $1,331,000 $235,983 $1,095,017 $3,624,644 $931,767 $3,134,894 $1,167,750

18 $1,331,000 $181,232 $1,149,768 $2,474,876 $986,518 $2,148,376 $1,167,750
19 $1,331,000 $123,744 $1,207,256 $1,267,619 $1,044,006 $1,104,369 $1,167,750
20 $1,331,000 $63,381 $1,267,619 $0 $1,104,369 $0 $1,167,750

Total
payments $23,205,000 Initial payment $1,000,000 Discount rate 5%
Average Cash payment
payment $1,160,250 Initial direct cost $150,000 Increase (five year) 10%

Source: Robert Singer, James Bosnick, John Loughlin, and Bailey Hays.

20 | Journal of Accountancy January 2023