On 1/1/20X1 20X1, Celia enter into a contract of leasing 3.000 square meter of office building for 8 years.

Annual lease payme

year is 120.000CU. On 1/1/20X5, Celia and lessor aggreed to expand the leased area for an additional area of 4.000 square m
years, and annual lease payment is 260.000 CU.
Incremental borrowing rate of Celia is 5% for 20X1, and 6% for 20X5.
Require: How Celia deals with the lease modification?

Assessment:
There is additional right of use asset
The prices increasing reflect stand alone price (original price: 40 per sq meter, the modified price: 37 per sq meter, this is reaso
So this modification is treated as a separate lease contract: lease payment of new contract = 260.000 - 120.000 =140.000, disc

Lease modification (1/1/20X5) ($485,114.79)

Debit Right-of-use asset: 485.115
Credit Lease liability : 485.115
 ears. Annual lease payment at the end of each
al area of 4.000 square meter for the remaining 4

per sq meter, this is reasonable since there is reduction of cost to obtain the contract)
- 120.000 =140.000, discount rate: 6%
 On 1/1/20X1, Melinda enter into a contract of leasing 5.000 square meter in a building office for 8 year. Lease payment at the
the lease payment is decreased to 130.000 CU. How should Melinda deals with the contract modification. Incremental borro

Assessment
There is no additional right of use asset => Change the existing lease
Initial recognition of the existing lease
Right of use asset at 20X1= Lease liability at 20X1
$1,292,642.55

Year

20X1
20X2
20X3
20X4
20X5
20X6
20X7
20X8
Lease modification Decrease in leased area of modified contract
Lease liability (before modification)
Write off Lease liability (due to unleased area by 40%)
New Lease liabilities (after revising for new lease payment, rate)
Reduction of Lease liability to establish new lease liability

Right of use asset (before modification) at 20X5

Write off Right of use asset (after modifying for area reduction by 40%)
New right of use asset

Write off for ROU and lease liability of the unleased area
DR Lease liability
CR ROU
CR P/L-Gain on the lease modification
Establish new lease liability & ROU
DR ROU
CR Lease liability
e for 8 year. Lease payment at the end of each year is 200.000 CU. On 1/1/20X5, Melinda and lessor agree to reduce the lease area to 3.00
modification. Incremental borrowing rate of Melinda is 5% for 20X1, and 6% for 20X

Lease liability Lease Decrease in Lease liability

Interest
beginning payment lease liability ending

$ 1,292,643 $ 64,632 $ 200,000 $ 135,368 $ 1,157,275

$ 1,157,275 $ 57,864 $ 200,000 $ 142,136 $ 1,015,138
$ 1,015,138 $ 50,757 $ 200,000 $ 149,243 $ 865,895
$ 865,895 $ 43,295 $ 200,000 $ 156,705 $ 709,190
$ 709,190 $ 35,460 $ 200,000 $ 164,540 $ 544,650
$ 544,650 $ 27,232 $ 200,000 $ 172,768 $ 371,882
$ 371,882 $ 18,594 $ 200,000 $ 181,406 $ 190,476
$ 190,476 $ 9,524 $ 200,000 $ 190,476 $ -
40%
$ 709,190.10
$ 283,676.04
$450,463.73
$24,949.67

$646,321.28
$ 258,528.51
$412,742.43

$ 283,676.04
$ 258,529
$ 25,147.53

$24,949.67
$24,949.67
educe the lease area to 3.000 square meter and