Finance and Operating Lease Exercise (Solution)

Table of Contents
Finance Lease
Operating Lease

Notes
This Excel model is for educational purposes only and should not be used for any other reason.
All content is Copyright material of CFI Education Inc.
https://corporatefinanceinstitute.com/

© 2020 CFI Education Inc.

All rights reserved.  The contents of this publication, including but not limited to all written material, content layo
No part of this publication may be modified, manipulated, reproduced, distributed, or transmitted in any form by
without prior written permission of the publisher, except in the case of certain noncommercial uses permitted by
 (Solution) Strictly Confidential

any other reason.

o all written material, content layout, images, formulas, and code, are protected under international copyright and trademark laws. 
ed, or transmitted in any form by any means, including photocopying, recording, or other electronic or mechanical methods,
noncommercial uses permitted by copyright law.
© Corporate Finance Institute. All rights reserved.

Finance Lease Exercise (Solution)

Instructions:
Company ABC enters into a 5-year lease beginning on January 1, 2021.
Annual payments are $20,000, made at the end of each year for a total of $100,000 over the lease term.
The rate implicit in the lease is 6%. There are no initial direct costs.

1. Calculate the initial lease liability and right-of-use asset balances.

2. Show the journal entries to record the lease for each of the years assuming that this is a finance lease

Initial Lease Liability and Right-of-Use Asset Balances

IBR / Interest Rate Implicit in the Lease 6% 2021 2022

Annual Lease Payments $20,000 $20,000

Initial Lease Liability Balance

Initial Right-of-Use Asset Balance

Lease Liability and Right-of-Use Asset Continuity Schedules

Lease Term 5 Years 2021 2022

Right-of-Use Asset
Beginning Balance $84,247 $67,398
Amortization -$16,849 -$16,849
Ending Balance $67,398 $50,548

Lease Liability
Beginning Balance $84,247 $69,302
Interest $5,055 $4,158
Lease Payments -$20,000 -$20,000
Ending Balance $69,302 $53,460

Journal Entries to Record the Finance Lease

January 1, 2021 (Initial Recognition)

Right-of-Use Asset
Lease Liability

Subsequent Recognition
December 31, 2021
Amortization Expense
Interest Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2022

Amortization Expense
Interest Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2023

Amortization Expense
Interest Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2024

Amortization Expense
Interest Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2025

Amortization Expense
Interest Expense
Lease Liability
Accumulated Amortization
Cash
lease term.

nance lease.

2023 2024 2025

$20,000 $20,000 $20,000

$84,247
$84,247

2023 2024 2025

$50,548 $33,699 $16,849

-$16,849 -$16,849 -$16,849
$33,699 $16,849 $0

$53,460 $36,668 $18,868

$3,208 $2,200 $1,132
-$20,000 -$20,000 -$20,000
$36,668 $18,868 $0

Debit Credit

$84,247
$84,247
$16,849
$5,055
$14,945
$16,849
$20,000

$16,849
$4,158
$15,842
$16,849
$20,000

$16,849
$3,208
$16,792
$16,849
$20,000

$16,849
$2,200
$17,800
$16,849
$20,000

$16,849
$1,132
$18,868
$16,849
$20,000
© Corporate Finance Institute. All rights reserved.

Operating Lease Exercise (Solution)

Instructions:
Company ABC enters into a 5-year lease beginning on January 1, 2021.
Annual payments are $20,000, made at the end of each year for a total of $100,000 over the lease term.
The rate implicit in the lease is 6%. There are no initial direct costs.

1. Calculate the initial lease liability and right-of-use asset balances.

2. Show the journal entries to record the lease for each of the years assuming that this is an operating lease

Initial Lease Liability and Right-of-Use Asset Balances

IBR / Interest Rate Implicit in the Lease 6% 2021 2022

Annual Lease Payments $20,000 $20,000

Initial Lease Liability Balance

Initial Right-of-Use Asset Balance

Lease Liability and Right-of-Use Asset Continuity Schedules

Lease Term 5 Years 2021 2022

Right-of-Use Asset
Beginning Balance $84,247 $69,302
Amortization -$14,945 -$15,842
Ending Balance $69,302 $53,460

Lease Liability
Beginning Balance $84,247 $69,302
Interest $5,055 $4,158
Lease Payments -$20,000 -$20,000
Ending Balance $69,302 $53,460

Journal Entries to Record the Operating Lease

January 1, 2021 (Initial Recognition)

Right-of-Use Asset
Lease Liability

Subsequent Recognition
December 31, 2021
Lease Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2022

Lease Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2023

Lease Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2024

Lease Expense
Lease Liability
Accumulated Amortization
Cash

December 31, 2025

Lease Expense
Lease Liability
Accumulated Amortization
Cash
lease term.

operating lease.

2023 2024 2025

$20,000 $20,000 $20,000

$84,247
$84,247

2023 2024 2025

$53,460 $36,668 $18,868

-$16,792 -$17,800 -$18,868
$36,668 $18,868 $0

$53,460 $36,668 $18,868

$3,208 $2,200 $1,132
-$20,000 -$20,000 -$20,000
$36,668 $18,868 $0

Debit Credit

$84,247
$84,247
$20,000
$14,945
$14,945
$20,000

$20,000
$15,842
$15,842
$20,000

$20,000
$16,792
$16,792
$20,000

$20,000
$17,800
$17,800
$20,000

$20,000
$18,868
$18,868
$20,000