On January 1, 2021, an entity entered into a lease of building with the with the following information:

Annual rental payable at the end of each year 500,000

Lease term 5 years
Useful life of building 20 years
Implicit Interest rate 10%
PV of an ordinary annnuity of 1 at 10% for 5 periods 3.791
The lease contained an option for the lessee to extend for a further 5 years. At the commencement date, the exercise
of the extension is not reasonably certain.

After 3 years on January 1, 2024, the lessee decided to extend the lease for a further 5 years.
New Annual rental payable at the end of each year 600,000
New Implicit interest rate 8%
PV of an ordinary annuity of 1 at 8% for 5 periods 3.993
PV of 1 at 8% for 2 periods 0.857
PV of an ordinary annuity of 1 at 8% for 2 periods 1.783

500,000 600,000
1/1/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030
0 1 2 3 4 5 6 7 8 9 10
10% 8%
1 Initial Measurement of Lease Liability
Payments 500,000
PVOA 3.791
1,895,500

2 Initial Measurement of ROUA

Lease Liability 1,895,500
1,895,500

3 Interest Expense (12/31/21)

Date Payments Int Exp Principal CA
1/1/2021 1,895,500
12/31/2021 500,000 189,550 310,450 1,585,050
12/31/2022 500,000 158,505 341,495 1,243,555
12/31/2023 500,000 124,356 375,645 867,911

4 Depreciation Expense (12/31/21)

Cost of ROUA 1,895,500
Lease term 5
379,100
5 Carrying amount of Lease Liability (12/31/23)
Answer found in the Amortization
Table 867,911

6 Carrying amount of ROUA (12/31/23)

Cost of ROUA 1,895,500
Acc dep (3 years)* 1,137,300
*from 1/1/21 to 12/31/23 758,200

7 Adjusted balance of Lease Liability (1/1/24)

Payment for the remaining years 500,000
PVOA at 8% for 2 periods 1.783
PV (1/1/24) 891,500

Payment for the extended yrs 600,000

PVOA at 8% for 5 periods 3.993
PV (1/1/26) 2,395,800
PV of 1 at 8% for 2 periods 0.857
PV (1/1/24) 2,053,201

Remeaseurement amt of lease liab 2,944,701

8 Adjusted ROUA (1/1/24)

Adj amt of lease liability 2,944,701
 CA (12/31/23) (867,911)
Increase in Lease Liab (1/1/24) 2,076,790

CA of ROUA (12/31/23) 758,200

Increase in Lease Liability 2,076,790
CA of ROUA (1/1/24) 2,834,990

9 Depreciation Expense (12/31/24)

CA of ROUA (1/1/24) 2,834,990
Remaining lease term (2+5) 7
404,999
10 Carrying amount of lease liability (12/31/26)
Date Payments Int Exp Principal CA
1/1/2024 2,944,701
12/31/2024 500,000 235,576 264,424 2,680,277
12/31/2025 500,000 214,422 285,578 2,394,699
12/31/2026 600,000 191,576 408,424 1,986,275
12/31/2027 600,000 158,902 441,098 1,545,177
12/31/2028 600,000 123,614 476,386 1,068,791
12/31/2029 600,000 85,503 514,497 554,294
12/31/2030 600,000 45,706 554,294 0
44,344
*The difference of 1,364 is due to the rounding of PV factor
On Jan. 1, 20x1, Entity X enteres into a 3-year lease of an office space. The annual rent is
100,000 payable in advance. Entity X has an option to extend the lease for another 3 years at an
annual rent of 120,000, which Entity A is uncertain to exercise because it believes there is no
economic incentive too do so. The implicit interest rate is 12%.

On Dec. 31, 20x2, due to a significant change in circumstances, Entity X is now reasonably
certain to extend the lease. The revised implicit interest rate is 10%.
1 Initial Measurement of Lease Liability and ROUA Journal Entry
Fixed payments 100,000
Multiply by: PV of an annuity due of 1 3 Jan. 1, 20x1
@12%, n=3* 269,005
Total
*The lease term is 3 years (excluding the 'uncertain' extension)

2 Depreciation expense (1/1/20x2)

Cost of ROUA 269,005
Lease term 3
89,668

3 Revised Lease Payments

Revised lease payments PV factors @ 10% PV
Due on 1/1/x3 100,000 (PV of 1, n=0) = 1 100,000
Due on 1/1/x4; x5; & x6 120,000 (PV ord. annuity, n=3) = 2.48685 298,422
398,422
4 Increase in Lease Liability
CA before reassessment 100,000
CA after reaseessment 398,422
Increase in lease liabilty 298,422

5 Adjusting Entry
Right-of-use asset 298,422
Dec. 31, 20x2
Leae Liability 298,422

6 Revised Annual Depreciation

Initial Measurement 269,005
Multiply by: 1/3
CA on 12/31/x2 89,668
Adjustment 298,422
Total 388,090
Divide by: Remaining lease term 4
Revised annual depreciation 97,023
Right-of-use asset 269,005
Cash 100,000
Lease Liability 169,005