Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the following: Lease term Five years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter Annual payments, beginning at lease commencement and annually thereafter Commencement – $25,000 Year 2 – $26,000 Year 3 – $27,000 Year 4 -- $28,000 Year 5 -- $29,000 Discount rate 4.0% Present value (PV) of lease payments $124,645 Complete the following table to show the impact on each year of Lessee’s income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1. Initial Year 1 Year 2 Year 3 Year 4 Year 5 Cash lease payments Income statement: Periodic lease expense (straight-line) Prepaid (accrued) rent for period Balance sheet at end of year: Lease liability ROU asset: Lease liability Adjust: Accrued rent (cumulative) Unamortized direct initial costs ROU asset
9. Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement
is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the
following:
Lease term Five years, with the first payment due at lease
commencement and the remainder annually at the lease
anniversary date thereafter
Annual payments, beginning at lease
commencement and annually
thereafter
Commencement – $25,000
Year 2 – $26,000
Year 3 – $27,000
Year 4 -- $28,000
Year 5 -- $29,000
Discount rate 4.0%
Present value (PV) of lease payments $124,645
Complete the following table to show the impact on each year of Lessee’s income statement and
balance sheet. Prepare the
the end of year 1.
Initial Year 1 Year 2 Year 3 Year 4 Year 5
Cash lease payments
Income statement:
Periodic lease expense
(straight-line)
Prepaid (accrued) rent for
period
Balance sheet at end of
year:
Lease liability
ROU asset:
Lease liability
Adjust: Accrued rent
(cumulative)
Unamortized direct
initial costs
ROU asset
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