EGE, KENNETH M.

BSA22A1

INTERMEDIATE ACCOUNTING II
BSA22A1
COURSE MODULE
LEASES

DAY-FOURONLINE EDUCATION
MAY 28, 2020

I. ILLUSTRATIVE EXAMPLE-VARIABLE PAYMENTS

On January 1, 2020, ABC Company entered into an 8-year lease of a floor of

a building with the following terms:
 Annual rent for the first three years payable at year end-300,000
 Annual rent for the next five years payable at year end- 400,000
 Implicit interest rate-10%
 PV of an ordinary annuity of 1 at 10% for 3 years-2.487
 PV of an ordinary annuity of a at 10% for 5 years-3.791
 PV of 1 at 10% for 3 years-0.751
The lease provides for neither a transfer of title to the lessee nor a purchase
option.
Computation
Annual rent for first three years 300,000
Multiply by PV of an ordinary annuity of 1 at 10% for 3
years 2.487
Present value –January 1,2020 746,100
Annual rent for next five years 400,000
Multiply by PV of an ordinary annuity of 1 at 10% for 5
years 3.791
Present value- January 1, 2023 1,516,400
Multiply by PV of 1 at 10% for 3 years 0.751
Present value-January 1, 2020 1,138,816

The present value of the annual rent for the next 5 years starting January
1,2023 is rediscounted for three years at the beginning of the lease on
January 1, 2020.
Present value of annual rentals for 3 years 746,100
Present value of annual rentals for next five years 1,138,816
Lease liability-January 1, 2020 1,884,916

Table of Amortization
Date Payment 10% Interest Principal Present Value
1/1/2020 1,884,916
12/31/2020 300,000 188,492 111,508 1,773,408
12/31/2021 300,000 177,341 122,659 1,650,749
EGE, KENNETH M. BSA22A1

12/31/2022 300,000 165,075 134,925 1,515,824

12/31/2023 300,000 151,582 248,418 1,267,406
12/31/2024 300,000 126,741 273,259 994,147
12/31/2025 300,000 99,415 300,585 693,562
12/31/2026 300,000 69,356 330,644 362,918
12/31/2027 300,000 37,082* 362,918 -

*Rounding off differential.

Journal Entries for 2020

1. Right of Use Asset 1,884,916

Lease Liability 1,884,916

2. Interest expense 188,492

Lease liability 111,508
Cash 300,000

3. Depreciation 235,615
Accumulated depreciation 235,615
(1,884,916/8 years)

The depreciation is based on the lease term of 8 years because there is neither a
transfer of title nor purchase option.

II. LEASE MODIFICATION

IFRS 16, par. 44, provides that the lessee shall account for the lease
modification as a separate lease under the following conditions:
1. The modification increases the scope of the lease by adding the right to
use an underlying asset.
2. The rent for the lease modification increases by an amount commensurate
with the increase in scope and equivalent of the current market rental.

ILLUSTRATION

On January 1, 2020, an entity entered into a lease contract with the following
data:
Floor space-3,000 square meters
Annual rent payable at the end of each year-100,000
Implicit interest rate-10%
Lease term-8 years
Present value of an ordinary annuity of 1 at 10% for 8 periods-5.3349
EGE, KENNETH M. BSA22A1

On January 1,2022, the entity and the lessor agreed to amend the original
terms of the lease with the following information. Additional floor space-
4,500 square meters; increase in rent payable at year end-200,000;
implicit rate in lease-8%;present value of an ordinary annuity of 1 at 8%
for 6 years-4.6229. The increase in the rental for the additional 4,500
square meters is equivalent to the current market rent.

Journal entries for 2020

Present value of the lease payments-January 1, 2020 (100,000 x

5.3349)=533,490

January 1 Right of Use Asset 533,490

Lease liability 533,490

December 31 Interest expense 53,349

Lease liability 46,651
Cash 100,000

31 Depreciation 66,686
Accumulated depreciation 66,686
On January 1, 2022 , the entity shall account for the modification as a
separate lease.

The entity shall recognize the right of use asset and lease liability for the
additional 4,500 square meter lease space on January 1, 2022. No
adjustment is made to the 3,000 square meter lease because of the
modification.

Computation
Present value of the additional lease payment on January 1, 2022
(200,000 x 4.62990=924,580

Journal Entries

January 1- Right of use asset 924,580

Lease liability 924,580

Dec. 31-Interest Expense 73,966

Lease liability 126,034
Cash 200,000

31-Depreciation 154,097
Accumulated depreciation 154,097
EGE, KENNETH M. BSA22A1

(924,580/6 years)

III. LEASE MODIFICATION-EXTENSION OF LEASE TERM

On January 1, 2020, an entity entered into a lease for office space with the ff.
data: annual rent payable at year end beginning Dec. 31,2020-200,000; lease
term;5 years; implicit interest-9%;PV of an ordinary annuity of 1 for 5 yrs. At
9%-3.89. On January 1, 2022,the entity and the lessor agreed to amend the
original lease by extending the lease term by 3 more years with the ff. data:
annual rent payable at year end beg. Dec. 31, 2022-200,000; implicit
interest-11%; PV of an ordinary annuity of 1 at 11% for 6 years.

Amortization schedule for 2020 and 2021. Present value of the lease liability
on January 1, 2020 (200,000 x 3.89)=778,000
Date Payment 9% Interest Principal Lease Liability
Jan. 1,2020 778,000
Dec. 31,2020 200,000 70,020 129,980 648,020
Dec. 31,2021 200,000 58,322 141,678 506,342

Journal entries for 2020

Jan 1 Right of Use Asset 778,000

Lease Liability 778,000

Dec 31 Interest Expense 70,020

Lease Liability 129,980
Cash 200,000

31 Depreciation expense 155,600

Accumulated depreciation 155,600
( 778,000/5 )
Lease liability due to extension

Present value of lease payments on 1/1/22 as a result of the

extension (200,000 x 4.231) 846,200
Carrying amount on 1/1/22 before the extension(see
schedule) (506,342)
Increase in lease liability 339,858
Revised Amortization Schedule
Date Payment Interest 11% Principal Lease Liability
1/1/22 846,200
12/31/22 200,000 90,082 106,918 739,282
12/31/23 200,000 81,321 118,679 620.603
12/31/24 200,000 68,266 131,734 488,869
EGE, KENNETH M. BSA22A1

12/31/25 200,000 53,776 146,224 342,645

12/31/26 200,000 37,691 162,309 180,336
12/31/27 200,000 19,664 180,336 -

Journal entries for 2022

Jan 1 Right of use asset 339,858
Lease liability 339,858

Dec 31 Interest expense 93,082

Lease liability 106,908
Cash 200,000

31 Depreciation 134,443
Accumulated depreciation 134,443
Cost of right of use asset 778,000
Accumulated dep. 12/31/21(155,000x 2years) (311,200)
Carrying amount-12/31/21 466,800
Increase in lease liability 339,858
Adjusted carrying amount -1/1/22 806,658
The increase in liability is an adjustment of the carrying amount of the
RUA
Old lease term 5 years
Expired 2020 and 2021 2
Remaining old lease term 3
Extension 3
Extended lease term 6 years
Depreciation for 2022 ( 806,658/6) 134,443
CASE PROBLEMS
1. On January 1, 2020 , Silver Company entered into a 5-year lease of a
floor of a building with these terms: annual rent for the first two years
payable at year end.-200,000; annual rent for the next 3 yrs. payable
at the end of each year-300,000; initial direct cost paid by the lessee-
100,000; leasehold improvement-250,000; present value of restoration
cost required by contract- 50,000; useful life of building- 20 yrs.;
implicit interest rate-8%; PV of an ordinary annuity of 1 at 8% for 2
yrs.-1.783; PV of an ordinary annuity of 1 at 8% for 3 yrs.-2.577 and
PV of 1 at 8% for 2 years-0.857.

Required:
1. Compute the following: lease liability on 1/1/20; right of use asset;
depreciation for 2020.
2. Prepare the following: table of amortization; journal entries for
2020 and on 12/31/22.
EGE, KENNETH M. BSA22A1

2. On Jan. 1, 2020, Southstar Company entered into an 8-year lease of a floor

building with useful life of 15 years with the ff. terms: annual rent for first 3
years due at end of each year-300,000; annual rent for the next 5 years due at
the end of each year-400,000; implicit interest rate-10%; PV of an ordinary
annuity of 1 at 10% for 3 periods-2.49;PV of an ordinary annuity of 1 at 10% for
5 periods-3.79; PV of 1 at 10% for 3 periods-0.75. The lease provides for neither
a transfer of title to the lessee nor a purchase option.

Required:
1. What is the lease liability on January 1, 2020?
a. 1,516,000 c. 1,884,000
b. 2,263,000 d. 1,697.250
2. What is the interest expense for 2020?
a. 188,400 c. 151,600
b. 226,300 d. 169,725
3. What is the interest expense for 2023
a. 151,460 c. 164,964
b. 126,606 d. 200,000
4. What is the lease liability on December 31, 2023
a. 1,614,604 c. 1,366,064
b. 1,266,064 d. 1,214,604

ANSWER:

1) Compute the following:

A) Lease Liability on 1/1/20

Annual rental for first 2 years 200,000

Multiply by PV of an ordinary annuity of 1 at 8% for
2 periods 1.783
Present Value – January 1, 2020 356,600

Annual rental for next 3 years 300,000

Multiply by PV of an ordinary anunuity of 1 at 8% for
3 periods 2.577
Present Value – January 1, 2022 773,100
Multiply by PV of 1 at 8% for 2 periods 0.857
Present Value – January 1, 2020 662,547

Present Value of annual rentals for 2 years 356,600

Present Value of annual rentals for next 3 years 662,547
Lease Liability – January 1, 2020 1,019,147
EGE, KENNETH M. BSA22A1

B) Right of Use Asset

Initial Lease Liability 1,019,147

Initial Direct Cost 100,000
Estimated Restoration Cost 50,000
Total Cost of Right of Use Asset 1,169,147

C) Depreciation for 2020

Depreciation (1,169,147/5) 233,829

2) Prepare the following:

A) Table for Amortization

Date Payment 8% Interest Principal Present Value

1/1/2020 1,019,147
12/31/2020 200,000 81,532 118,468 900,679
12/31/2021 200,000 72,054 127,946 772,753
12/31/2022 300,000 61,819 238,181 534,552
12/31/2023 300,000 42,779 257,221 277,331
12/31/2024 300,000 22,669 227,331 -

B) Journal Entries for 2020

1) Right of Use Asset 1,069,147

Lease Liability 1,019,147
Cash 100,000
Estimated Liability – restoration cost 50,000

2) Depreciation 233,829
Accumulated Depreciation 233,829

3) Interest Expense 81,352

Lease Liability 118,468
Cash 200,000

C) Journal Entry for 12/31/2022

Dec. 31 Interest Expense 61,819

Lease Liability 238,181
Cash 300,000
EGE, KENNETH M. BSA22A1

REQUIRED:
1. What is the lease liability on January 1, 2020?
a. 1,516,000 c. 1,884,000
b. 2,263,000 d. 1,697.250

ANSWER:
Present Value for first 3 years (300,000 x 2.49) 747,000

Present Value for next 5 years (400,000 x 3.79) 1,516,000

Multiply by PV of 1 at 10% for 3 periods 0.75
Present Value – January 1, 2020 1,137,000
Present Value for first 3 years 747,000
Lease Liability – January 1, 2020 1,884,000

2. What is the interest expense for 2020?

a. 188,400 c. 151,600
b. 226,300 d. 169,725

ANSWER:
Interest Expense for 2020 (10% x 1,884,000) 188,400

3. What is the interest expense for 2023

a. 151,460 c. 164,964
b. 126,606 d. 200,000

ANSWER:
Interest Expense for 2023 (10% x 1,514,604) 151,460

4. What is the lease liability on December 31, 2023

a. 1,614,604 c. 1,366,064
b. 1,266,064 d. 1,214,604

ANSWER:
Date Payment 10% Interest Principal Lease Liability
Jan. 1,2020 1,884,000
Dec. 31,2020 300,000 188,400 111,600 1,772,400
Dec. 31,2021 300,000 177,240 122,760 1,649,640
Dec. 31,2022 300,000 164,964 135,036 1,514,604
Dec. 31,2023 400,000 151,460 248,540 1,266,064