om oi sm om 0 nee CHAPTER 11 LESSEE ACCOUNTING Remeasurement of lease liability | TECHNICAL KNOWLEDGE To remeasure the lease liability in case of an extension option. To measure the lease liability when lease contains variable payments. To identify a lease modification that is accounted for separately. To know the recognition of a lease modification relating to extension of lease term, decrease in scope of lease and change in rental payment. 356EXTENSION OPTION On January 1, 2022, an entity entered into a lease of building with the following information: Annual rental payable at the end of each year 500,000 Lease term S years Useful life of building 20 years Implicit interest rate 10% PV of an ordinary annuity of 1 at 10% for 6 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 option is not reasonably certain. After 3 years on January 1, 2025, 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 ofan ordinary annuity of 1 at 8% for 5 periods 3.993 PV of 1 at 8% for 2 periods 0.857 PVofan ordinary annuity of 1 at 8% for 2 periods 1.783 Table of amortization Date Payment Interest Principal Present value V/1/2022 1,895,500 12/31/2022 500,000 189,550 310,450 1,585,050 12/31/2023 500,000 158,505 341,495 1,243,555 12/31/2024 500,000 124,355 375,645 867,910 December 31, 2022 Payment on December 31, 2022 500,000 Interest expense for 2022 (10% x 1,895,500) (189,550) Applicable to principal 310,450 Present value — January 1, 2022 (500,000 x 3.791) 1,895,500 Principal payment on December 31, 2022 (310,450) Lease liability - December 31, 2022 1,585,050 357Journal entries for 2022 fuse nant 1,895,500 Jen 1 ais tes Tit 1,895,500 j sroat expone 189,550 Doc. 31 neta 310,450 Ciushy 500,000 a1 Depreciation (1,895,500/5 years) 379,100 ‘ Accumulated depreciation 379,100 Remoasurement of lease liability ry 1, 2025, the lease liability j, i January 1, 2020, aoulily is remeasured usin, i laa implicit interest rate of 8%, . al rontal for remaining 2 years of old | Amey DV of an ordinary annuicy ote ease ferm 600,000 8% for 2 periods ne presont value —danuary 1, 2025 a Annual rental for 5 years starting January 1 Multiply by PV of an ordinary annuity of bat 600,000 800 for 5 periods = present value ~ January 1, 2027 Multiply by PV of 1 at 896 for 2 periods eee Present value — January 1, 202, 0857 Present y i et The present value of the new rentals on January 1, 2027 is rediscounted for 2 periods on the date of extension on January 1, 2025. Present value of remaining rentals of old | ase ti 91,500 Present value ofnew rentals of extended lease torm _2,¢84°500 Total present value — January 1, 2025 2,944,700 Present value ~ December 31, 2024 (see table) (867,910) Increase in lease liability on January 1, 2025 2,076,790 Right of use asset - January 1, 2022 1,895,500 Accumulated depreciation — December 31, 2024 (379,100 x 3 years) (1,137,300) Carrying amount ~ December 31, 2024 758,200 Incréase in liability on Janury 1, 2025 2,076,790 New carrying amount — January 1, 2025 2,834,990 IFRS 16, paragraph 39, provides that the remeasurement of the lease liability is an adjustment of the carrying amount of the right of use asset. 358New table amortization 8%) Date Payment Lo Principal Present value 1/1/2025 2,944,700 12/31/2025 500,000 235,576 264,424 2,680,276 12/31/2026 500,000 214,499 285,578 2,394,698 12/31/2027 600,000 ~—-191,576 408,424 1,986,274 12/31/2028 600,000 158,902 441,098 1,545,176 12/31/2029 600,000 123,614 476,386 1,068,790 12/31/2080 600,000 85,503 514,497 554,293 12/31/2031 600,000 45,707* 55,293 * 8% x P554,293 equals P44,343 There is a difference of P1,364 due to rounding of present value factor. Journal entries for 2025 1. To remeasure the lease liability on January 1, 2025: Right of use asset 2,076,790 Lease liability 2,076,790 ¢ The increase in lease liability is an addition to the carrying amount of the right of use asset. 2, To record the annual rental on December 31, 2025: Interest expense 235,576 Lease liability 264,424 Cash 500,000 3, To record the annual depreciation based on the new carrying amount: Depreciation 404,999 Accumulated depreciation (2,834,990 / 7 yrs.) 404,999 The total lease term is 10 years minus 3 years expired equals remaining term of 7 years. 359VARIABLE PAYMENTS On January 1, 2022, an entity entered into an g-year lease of a floor of a building with useful life of 15 years under the following terms: Annual rental for the first three years payable at the end of each year ee Annual rental for the next five years payable at the end of each year 400,000 Implicit interest rate A 2.49 PV ofan ordinary annuity of 1 at 10% for three periods 3.79 PV of an ordinary annuity of 1 at 10% for five periods 075 PV of 1 at 10% for three periods The lease provided for neither a transfer of title to the lessee nor a purchase option. Computation Annual rental for first three years 300,000 Multiply by PV of an ordinary annuity of 4 Lat 10% for three periods 49 Present value—January 1, 2022 747,000 Annual rental for next five years 400,000 Multiply by PV of an ordinary annuiy of 1 at 10% : for five periods 3.79 Present value - January 1, 2025 1,516,000 Multiply by PV of 1 at 10% for three periods 0.75 Present value - January 1, 2022 1,137,000 The present value of the annual rental for the next five years starting January 1, 2025 is rediscounted for three periods at the beginning of the lease on January 1, 2022. Present value of annual rentals for first three years 747,000 Present value of annual rentals for next five years 1,137,000 Lease liability - January 1, 2022 1,884,000 360Table of amortiztion (10%) Date Payment Interest Principal Present value 1/1/2022 1,884,000 12/31/2022 300,000 ~—188,400 111,600 1,772,400 12/31/2023 300,000 177,240 122,760 1,649,640 12/31/2024 300,000 164,964 135,036 1,514,604 12/31/2025 400,000 161,460 248,540 1,266,064 12/31/2026 400,000 126,606 278,394 992,670 12/31/2027 400,000 99,267 300,733 691,937 12/31/2028 400,000 69,194 330,806 361,131 12/31/2029 400,000 38,869* 361,131 - * 10% x P361,131 equals P36, 113. There is a difference of P2,756 due to rounding of present value factor. Journal entries for 2022 1, Right of use asset 1,884,000 Lease liability 1,884,000 2, Interest expense 188,400 Lease liability 111,600 Cash 300,000. 3. Depreciation 235,500 Accumulated depreciation 235,500 (1,884,000 /8 years) The depreciation is based on the lease term of 8 years because there is neither a transfer of title nor purchase option 361LEASE MODIFICATION , IFRS 16, paragraph 44, provides that the lessee shall account for the lease modification as a separate lease under the following conditions: a. The modification increases the scope of the lease by adding the right to use an additional underlying asset. b. The rental for the lease modification increases by an amount commensurate with the increase in scope and equivalent to the current market rental. Illustration i On January 1, 2022, an entity entered into a lease agreement with the following information: Floor pace 300 square meters Annual rental payable at the end of each year 100,000 Implicit rate in the lease 10% Lease term 8 years Present value of an ordinary annuity of Lat 10% for 8 periods 5.34 On January 1, 2024. the entity and the lessor agreed to amend the original terms of the lease with the following information: Additional floor space 450 square meters Increase in rental payable at the énd of each year 200,000 Implicit rate in the lease 8% Present value of an ordinary annuity of 1 at 8% for 6 periods 4.62 The increase in the rental for the additional 450 square meters is equivalent to the current market rent. 362Journal ontries for 2022 Present value of the lease payments —danuary 1, 2022 (100,000 x 8,34) oe : dan 1 Rightoafuse assot 534,000 Lease liability 534,000 Dec, 81 Interest expense (534,000 x 10%) 3.400 Lease liability 46,600 Cash 100,000 31 Depreciation (634,000/8) 66,750 Accumulated depreciation 66,750 On January 1, 2024, 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 450 square-meter lease space on January 1, 2024. No adjustment is made to the 300 square-meter lease because of the modification. Present value of the additional lease rentals on January 1, 2024 (200,000 x 4.62) 924,000 Journal entries for 2024 — new separate lease Jan. 1 Right of use asset 924,000 Lease liability 924,000 Dec. 31 Interest expense (924,000 x 8%) 73,920 Lease liability 126,080 Cash 200,000 31 Depreciation 154,000 Accumulated depreciation 154,000 (924,000/6 years) Remaining lease term (8 years — 2 years expired) 6 years 363Lease modification - extension of lease term On January 1, 2022, an entity entered into a lease for office space with the following information: Annual rental payable at the end of each year 200,000 beginning December 31, 2022 ‘Bye Lease term a Impli i implicit rate in the lease deat 9% 3.89 Present value of an ordinary annuity of 1 for 5 perio On January 1, 2024, the entity and the lessor oe v4 amend the original lease by extending the lease term by more years with the following information: Annual rental rental payable at end of each rao eat beginning December 31, 2024 200,000 mplicit rate in the lease %for6periods 4.231 Present value of an ordinary annuity of 1 at 11 Amortization schedule for 2022 and 2023 Present value of the lease liability on January 1, 2022 (200,000 x 3.89) 778,000 Lease Date Payment 9% interest Principal liability Jan. 1, 2022 7B Dec. 31, 2022 200,000 70,020 129,980 06 342 Dec. 31,2023 — 200,000 58,322 141,678 506, Journal entries for 2022 Jan. 1 Rightofuse asset 78000 = Lease liability 778,000 Dec. 31 Interest expense 70,020 i 129,980 eee 200,000 31 " Depreciation 155,600 : Accumulated depreciation 155,600 (778,000/5) New lease liability due to extension Present value of new rentals on January 1, 2024 as a result of the extension (200,000 x 4.231) 846,200 Carrying amount on January 1, 2024 before the extension — see schedule (506,342) Increase in lease liability - January 1, 2024 339,858 364Revised amortization schedule on Lease a Payment 11% Interest Principal Liability Jan. 1,2024 846,200 Dec. an aon 200,000 93,082 106,918 739,282 Dec. 31,2025 200,000 81,321 118,679 620,603 Dec. 31,2026 200,000 68,266 131,734 488,869 Dec. 31,2027 200,000 53,776 146,224 342,645 Dec. 31,2028 — 200,000 37,691 162,309 180,336 Dec. 31,2029 200,000 19,664 180,336 iad Journal entries for 2024 Jan. 1 Rightofuse asset 339,858 Lease liability 339,858 Dec. 31 Interest expense 93,082 Lease liability 106,918 Cash 200,000 31 Depreciation 134,443. Accumulated depreciation 134,443 Cost of right use asset 778,000 Accumulated depreciation - December 81, 2023 (155,600 x 2 years) (311,200) Carrying amount ~ December 81, 2023 466,800 Increase in lease liability -339,858 Adjusted carrying amount — January 1, 2024 806,658 The increase in libility is an addition to the carrying amount of the right of use asset. Old lease term year Expired 2022 and 2023 oD Remaining old lease term 3 Extension 3 ac! Extended lease term Depreciation for 2024 (806,658 /6) 365‘Lease modification - decrease in scope of lease On January 1, 2022, an entity entered into a lease of office space with the following information: 100 square meters Floor space Annual rental payable at the end of each year 40,000 Lease term 10 years Implicit rate in the lease 8% Present value of an ordinary annuity of 1 for 8% for 10 periods 6.71 Present value of lease payments ~ January 1, 2022 (40,000 x 6.71) 268,400 Table of amortization for 2022 and 2023 Lease Date Payment 8% interest Principal Leability Jan. 1, 2022 268,400 Dec. 31,2022 40,000 21,472 18,528 249,872 Dec. 31,2023 40,000 19,990 20,010 229,862 Journal entries for 2022 Jan. 1 Right of use asset 268,400 Lease liability 268,400 Dec. 31 Interest expense 21,472 Lease liability 18,528 Cash 40,000 31 Depreciation (268,400/10) 26,840 ‘Accumulated depreciation 26,840 Amendment of the lease On January 1, 2024, the lessee and the lessor agreed to amend the original terms of the lease with the following information: 60 square meters Floor space Annual rental payable at the end of each year 30,000 Implicit rate in the lease 10% Present value of an ordinary annuity of Lat 10% for 8 periods 5.335 366Decrease in scope Since the floor space was reduced to 60 square meters, the scope of the lease was reduced by 40%. IFRS 16, paragraph 46, states that a gain or loss should be fel asa result of the partial termination of the lease. If the decrease in carrying amount of lease liability is higher than the decrease in carrying amount of right of use asset, the difference is a termination gain. If the decrease in carrying amount of lease liability is lower than the decrease in carrying amount of right of use asset, the difference is a termination loss. Cost of right of use asset ‘268,400 Accumulated depreciation December 31, 2023 (26,840 x 2) (53,680) Carrying amount ~ December 81, 2023 214,720 Decrease in carrying amount of lease liability (229,862 x 40%) 91,945 Decrease in carrying amount of right of use asset (214,720 x 40%) 85,888) Termination gain . 6,057 Lease liability — January 1, 2024 (see table) 229,862 Reduction of old lease liability 91,945) Remaining old lease liability - January 1, 2024 137,917 Present value of new rentals on January 1, 2024 as a result of the decrease in scope (30,000 x 5.335) 160,050 Carrying amount of old lease liability on January 1,2024 (137,917) Increase in lease liability - January 1, 2024 22,133 The increase in lease liability as a result of the lease modification is an addition to the carrying amount of right of use asset. 367Revised table of amortization Date Payment 10% Interest Principal Jan. 1,2024 Dec. 31,2024 30,000 16,005 13,995 Dec. 31,2025 30,000 14,605 15,395 Dec. 31,2026 30,000 13,066 16,934 Dec. 31,2027 30,000, 11,373 18,627 Dec. 31,2028 30,000 9,510 20,490 Dec. 31,2029 30,000 7,461 22,539 Dec. 31,2030 30,000 5,207 24,793 Dec. 31,2031 30,000 2,723 27,277 Adjusted balances - December 31, 2023 Accumulated Cost depreciation Right of use asset 268,400 53,680 Reduction by 40% (107,360) (21,472) Balance 161,040 32,208 Increase in lease liability _22,133 = Adjusted balance 183,173 32,208 Journal entries for 2024 Jan. 1 Lease liability 91,945 Accumulated depreciation 21.472 Right of use asset 5 ‘Termination gain 7 1 Right of use asset 22,133 Lease liability Dec. 31 Interestexpense 16,005 Lease liability 13,995 Cash Depreciation 18,871 Accumulated depreciation (150,965 / 8 years remaining) 368 Lease Liability 160,050 146,055, 130,660 113,726 “95,099 74,609 52,070 27,277 Carrying amount 214,720 (85,888) 128,832 22,133 150,965 107,360 6,057 22,133 30,000 18,871Lease modification — change in rental On January 1, 2022, an entity leased equipment with the following information. Annual rental payable at the end of each year 80,000 Lease term 6 years Implicit rate in the lease ™% Present value of an ordinary annuity of 1 at 7% for 6periods 4.77 Present value of lease rentals - January 1, 2022 (80,000 x 4.77) 381,600 Table of amortization ) Lease Date Payment 7%Interest Principal liability Jan. 1, 2022 381,600 Dec. 31,2022 80,000 26,712 53,288 328,312 Dec. 31,2023 80,000 22,982 57,018 271,294 Dec. 31,2024 80,000 18,991 61,009 210,285 Journal entries for 2022 Jan. 1 Rightofuse asset ‘ 381,600 Lease liability 381,600 Dec, 31 Interest expense 26,712 Lease liability 53,288 Cash 80,000 31 Depreciation (381,600 /6) 63,600 Accumulated depreciation 63,600 Amendment of the lease On January 1, 2025, the entity and the lessor agreed to amend the original terms of the lease by reducing the lease payment to P70,000 and increasing the implicit rate to 9%. The present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53. 369Computation Modified lease liability — January 1, 2025 (70,000 x 2.53) 177,100 Carrying amount of lease liability - December 31, 2024 210,285) Decrease in lease liability 33,185) The decrease in liability is a reduction in the carrying amount of the right of use asset. Cost of right of use asset 381,600 Accumulated depreciation —January 1, 2025 (63,600 x 3) (190,800) Carrying amount — January 1, 2025 190,800 Decrease in lease liability (33.185) Adjusted carrying amount - January 1, 2025 157,615 Revised amortization schedule Lease Date Payment 9%Interest Principal liability dan. 1,2025 177,100 Dec. 31,2025 “70,000 15,939 54,061 123,039 Dec. 31, 2026 70,000 11,074 58,926 64,113 Dec. 31, 2027 70,000 5,887 64,113 = Journal entries for 2025 ‘ Jan. 1 Leaselliability 33,185 Right of use asset 33,185, Dec. 31 Interest expense 15,939 Lease liability 54,061 Cash 70,000 31 Depreciation 52,538, Accumulated depreciation 52,538 (157,615 / 3 years remaining) 370QUESTIONS 1. Explain the recognition of an extension option that is not reasonably certain. . Explain the remeasurement of the lease liability if the lessee decides to extend the lease term. . Explain the measurement of the lease liability when the lease contains variable payments. . Explain the lease modification that is accounted for as a separate lease. . Explain the remeasurement of liability under the following conditions: a. Lease modification due to extension of lease term b. Lease modification due to decrease in scope c. Lease modification due to change in rental 371PROBLEMS : Problem 11-1 (IFRS) On January 1, 2022, Cavalier Company entered into a lease of building with the following information: i Annual rental payable at the end of each year 600,000 Lease term 5years Useful life of building 20 years Implicit interest rate 9% PV onan ordinary annuity of 1 at 9% for 5 periods 3.89 The lease contained an option for the lessee to extend the lease for a further 5 years. At the commencement date, the exercise of the extension option is not reasonably certain. After 3 years on January 1, 2025, the lessee decided to extend the lease for a further 5 years. New annual rental payable at the end of each year 800,000 New implicit interest rate 12% PV of an ordinary annuity of 1 at 12% for 5 periods 3.605 PV of 1 at 12% for 2 periods 0.797 PV of anordinary of 1 at 12% for 2 periods 1.690 Required: Prepare a table of amortization for 2022, 2023 and 2024. Prepare journal entries for 2022. Remeasure the lease liability on January 1, 2025. Prepare a new table of amortization from 2025 to 2031. Prepare journal entries for 2025. oR he 372Problem 11-2 (IFRS) On January 1, 2022, Gold Company entered into a 5-year lease of a floor of a building with the following terms: Annual rental for the first two years payable at the end of each year * 200,000 Annual rental for the next three yearspayable at the end of each year 300,000 Useful life of building : 20 years Implicit interest rate 8% PV of an ordinary annuity of 1 at 8% for two periods 1.78 PV of an ordinary annuity of 1 at 8% for three periods 2.58 PV of 1 at 8% for two periods = Required: 1 Prepare journal entries for 2022. 2. Prepare the journal entry for the lease rental on December 31, 2024. Problem 11-3 (IFRS) On January 1. 2022, Silver Company entered into a lease agreement with the following information: Floor space 150 square meters Annual rental payable at the end of each year 200,000 Implicit rate in the lease 12% Lease term 12 years PV ofan ordinary annuity at 12% for 12 periods 6.19 On January 1, 2025, Silver Company and the lessor agreed to amend the original terms of the lease with the following information: Additional floor space 200 square meters Increase in rental payable at the end of each year 300,000 Implicit rate in the lease 10% PV of anordinary annuity of 1 at 10% for 9 periods 5.76 Required: 1. Prepare journal entries for 2022. 2. Prepare journal entries for 2025 pertaining to the lease of additional floor space 373Problem 11-4 (IFRS) On January 1, 2022, Diamond Company leased an office building with the following terms: aa Annual rental payable at the end of each year 300,000 Lease term and useful life of the building evens Implicit rate in the lease 10% 3.17 PV ofan ordinary annuity of 1 at 10% for 4 periods “On January 1, 2024, Diamond Company and the lessor agreed to amend the original terms of the lease with the following information: Annual rental payable at end of each year 300,000 Extension of lease term 3 years Implicit rate in the lease ae PV value of an ordinary annuity of | at 12% for 5periods 3.605 Required: Prepare journal entries for 2022 and 2024. Problem 11-5 (IFRS) On January 1, 2022, Jade Company leased a machine with the following information: Annual rental payable at the end of each year 100,000 Lease term 5years Implicit rate in the lease 6% Present value of an ordinary annuity of lat 6% for 5 periods 4.21 On January 1, 2024, Jade Company and the lessor agreed to amend the original terms of the lease by reducing the annual lease payment by P20,000 and increasing the implicit rate to 8%. The present value of an ordinary annuity of 1 at 8% for 3 periods is 2.58. Required: Prepare the journal entries for 2022 and 2024. 374Problem 11-6 (IFRS) On January 1, 2022, Bronze Company entered into a lease for floor space with the following information: Floor space 400 square meters Annual rental payable at the end of each year 200,000, Lease term Syeare Implicit rate in the lease noe Present value of an ordinary annuity of 1 for 10% at 5 periods 3.79 On January 1, 2024, Bronze Company and the lessor agreed to amend the original terms of the lease with the following information: Floor space 300 square meters Annual rental payable at the end of each year 150,000 Implicit rate in the lease 8% Present value of an ordinary annuity of 1 for 8% at 3 periods 2.58 Required: 1. Prepare the amortization schedule for 2022 and 2023. Prepare the journal entries for 2022. Compute the termination gain or loss on January 1, 2024. Remeasure the lease liability on January 1, 2024. 2 oF Prepare the amortization schedule for 2024, 2025 and 2026. 6. Prepare the journal entries for 2024. 375Problem 11-7 (IFRS) On January 1, 2022, Southstar Company entered into a lease of building on with the following information: Annual rental payable at the end of each year 600,000 Lease term 5 years Useful life building 20 years Implicit interest rate 10% PV of an ordinary annuity of 1 at 10% for 5 periods 3.79 The lease contained an option for the lessee to extend for a further 5 years. At the commencement date, the exercise of the extension option is not reasonably cretain. After 2 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 800,000 New implicit interest rate 8% PV ofan ordinary annuity of 1 at 8% for 5 periods 3.99 PV of 1 at 8% for 3 periods 0.79 PV ofan ordinary annuity of 1 at 8% for 3 periods 2.58 1. What amount should be reported as lease liability on December 31, 2023? ' a. 2,274,000 b. 1,901,400 c. 1,491,540 d. 1,800,000 2. What amount should be reported as new lease liability on January 1, 2024? 3,192,000 2,521,680 4,000,000 . 4,069,680 poop 8. What is the carrying amount of right of use asset on January 1, 2024? a. 1,364,400 b. 3,942,540 c. 3,200,000 d. 2,578,140 376Problem 11-8 (IFRS) On January 1, 2022, Northstar Company entered into an 8-year lease of'a floor of building with useful life of 15 years with the following terms: Annual rental for the first three years payable Anntisthe end of each year 300,000 nual rental for the next five years payable at the end of each year! es PAY 400,000 Implicit interest rate 10% PV of an ordinary annuity of 1 at 10% for three periods 2.49 PV of an ordinary annuity of 1 at 10% for five periods 3.79 PV of at 10% for three periods 0.75 The lease provided for neither a transfer of title to the lessee nor a purchase option. 1. What amount should be reported as lease liability on January 1, 2022? 1,516,000 2,263,000 1,884,000 1,697,250 a. b. c. d. 2. Nee should be reported as interest expense for a. 188,400 b. 226,300 ce. 151,600 d. 169,725 3. et should be reported as interest expense for 2025? a. 151,460 b. 126,606 c. 164,964 d. 200,000 4. What amount should be reported as lease liability on December 31, 2025? a. 1,614,604 b. 1,266,064 c. 1,366,064 d. 1,214,604 377