In your audit of Entity A, you noted that the Rent expense account has an ending balance of $1,100,000 at December 31, 2021. $100,000 of this pertains to the maintenance costs paid by the Lessor on behalf of Entity A, which was later paid by Entity A. The lease commenced on January 1, 2021. The following are the terms of agreement. Terms of the Lease Agreement Lease term 8 years Useful life 10 years Annual rental payments due at the end of the year $1,000,000 Residual value the end of useful life $500,000 Bargain purchase option 200,000 Maintenance costs reimbursed to lessor 100,000 Implicit rate 8% Note: There is reasonable certainty that the purchase option will be exercised by Entity A at the end of the lease term Required: 1. Compute for the (a) initial lease liability and the cost of the right-of-use asset, (b) Depreciable amount to be used and depreciation expense (c) Carrying amount of the lease liability and the right- of-use asset at the end of the year. 2. Show adjusting entries to correct the "Rent expense" account and to recognize the lease-related items. Case Scenarios: 1. How will the computations in #1 change assuming that instead of the purchase option, there is a Residual Value Guarantee of $200,000 at the end of the lease term? 2. Assume that Entity A classified the right-of-use asset as Investment Property measured at fair value, what will be the initial and subsequent measurement of the asset?
In your audit of Entity A, you noted that the Rent expense account has an ending balance of $1,100,000 at December 31, 2021. $100,000 of this pertains to the maintenance costs paid by the Lessor on behalf of Entity A, which was later paid by Entity A. The lease commenced on January 1, 2021. The following are the terms of agreement. Terms of the Lease Agreement Lease term 8 years Useful life 10 years Annual rental payments due at the end of the year $1,000,000 Residual value the end of useful life $500,000 Bargain purchase option 200,000 Maintenance costs reimbursed to lessor 100,000 Implicit rate 8% Note: There is reasonable certainty that the purchase option will be exercised by Entity A at the end of the lease term Required: 1. Compute for the (a) initial lease liability and the cost of the right-of-use asset, (b) Depreciable amount to be used and depreciation expense (c) Carrying amount of the lease liability and the right- of-use asset at the end of the year. 2. Show adjusting entries to correct the "Rent expense" account and to recognize the lease-related items. Case Scenarios: 1. How will the computations in #1 change assuming that instead of the purchase option, there is a Residual Value Guarantee of $200,000 at the end of the lease term? 2. Assume that Entity A classified the right-of-use asset as Investment Property measured at fair value, what will be the initial and subsequent measurement of the asset?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:In your audit of Entity A, you noted that the Rent expense account has an ending balance of
$1,100,000 at December 31, 2021. $100,000 of this pertains to the maintenance costs paid by the
Lessor on behalf of Entity A, which was later paid by Entity A.
The lease commenced on January 1, 2021. The following are the terms of agreement.
Terms of the Lease Agreement
Lease term
8 years
Useful life
10 years
Annual rental payments due at
the end of the year
$1,000,000
Residual value at the end of useful life
$500,000
Bargain purchase option
200,000
Maintenance costs reimbursed to
lessor
100,000
8%
Implicit rate
Note: There is reasonable certainty that the purchase option will be exercised by Entity A at the end
of the lease term
Required:
1. Compute for the (a) initial lease liability and the cost of the right-of-use asset, (b) Depreciable
amount to be used and depreciation expense (c) Carrying amount of the lease liability and the right-
of-use asset at the end of the year.
2. Show adjusting entries to correct the "Rent expense" account and to recognize the lease-related
items.
Case Scenarios:
1. How will the computations in #1 change assuming that instead of the purchase option, there is a
Residual Value Guarantee of $200,000 at the end of the lease term?
2. Assume that Entity A classified the right-of-use asset as Investment Property measured at fair
value, what will be the initial and subsequent measurement of the asset?
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