Chapter 15, Problem 15.27P

Modification of a lease

• LO15–2, LO15–3, LO15–6

On January 1, 2018, Worchester Construction leased International Harvester equipment from Newton LeaseCorp. Newton LeaseCorp purchased the equipment from Wellesley Harvester at a cost of $958,158. Worchester borrowing rate for similar transactions is 10%.

The lease agreement specified four annual payments of $200,000 beginning January 1, 2018, the beginning of the lease, and on each December 31 thereafter through 2020. The useful life of the equipment is estimated to be six years. The present value of those four payments at a discount rate of 10% is $697,370.

On January 1, 2020 (after two years and three payments), Worchester and Newton agreed to extend the lease term by two years. The market rate of interest at that time was 9%.

Required:

1. 1. Prepare the appropriate entries for Worchester Construction on January 1, 2020, to adjust its lease liability for the lease modification.
2. 2. Prepare all appropriate entries for Newton LeaseCorp on January 1, 2020, to record the lease modification.
3. 3. Prepare all appropriate entries for Worchester Construction on December 31, 2020, related to the lease.
4. 4. Prepare all appropriate entries for Newton LeaseCorp on December 31, 2020, related to the lease.