CHAPTER 15 Leases 921 We see the amortization schedule for the lease payable/receivable in Illustration 15–24B . That amortization schedule is no different from what we would use under current GAAP if we were to record this arrangement as a capital lease. It shows how the lease balance and the effective interest change over the six-year lease term, using an effective interest rate of 10%. Each lease payment after the first one includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance. The periodic reduction is sufficient that, at the end of the lease term, the outstanding balance is zero. Illustration 15–24B Lease Amortization Schedule Payments Effective Interest Decrease in Balance Outstanding Balance (10% 3 Outstanding balance) 1/1/16 479,079 1/1/16 100,000 100,000 379,079 12/31/16 100,000 .10 ( 379,079 ) 5 37,908 62,092 316,987 12/31/17 100,000 .10 (316,987) 5 31,699 68,301 248,686 12/31/18 100,000 .10 (248,686) 5 24,869 75,131 173,555 12/31/19 100,000 .10 (173,555) 5 17,355 82,645 90,910 12/31/20 100,000 .10 ( 90,910) 5 9,090 * 90,910 0 600,000 120,921 * 479,079 *Adjusted for rounding of other numbers in the schedule. The first rental payment includes no interest. The total of the cash payments ($600,000) provides for: 1. Payment for the equipment’s use ($479,079). 2. Interest ($120,921) at an effective rate of 10%. Both the lessee and lessor would use this amortization schedule. The lessee amortizes its lease payable and records interest expense. Similarly, the lessor amortizes its lease receivable and records interest revenue, reflecting the opposite side of the same transaction. Now, let’s see how the lessee amortizes its right-of-use asset over the term of the lease. RECORDING AMORTIZATION OF THE RIGHT-OF-USE ASSET Like other noncurrent assets, the lessee’s right-of-use asset provides an economic benefit (the right to use a productive asset) over the period covered by the lease term. Consistent with a reduction in that benefit over time, the lessee amortizes its right-of-use asset over the lease term (or the useful life of the asset if that is shorter). The amortization process usually is on a straight-line basis unless the lessee’s pattern of using the asset is different. 42 That results in an expense for the lessee. In our example, the lessee amortizes its right-of-use asset over a six-year lease term. December 31, 2016 and End of Next Five Years Amortization expense ($479,079 ÷ 6 years) ......................................... 79,847* Right-of-use asset ........................................................................... 79,847 *rounded Because the lessor, First LeaseCorp, removed the asset from its records at the beginning of the lease, it would not have depreciation to record. Note that, as with capital leases in current GAAP, the lessee records more expense and the lessor records more revenue early in the life of the lease. This “front loading” of lease expense occurs due to the fact that interest is higher initially than it is in the later stages of a lease, while amortization expense for the right-of-use asset remains the same each period. A key objective of Type B lease accounting we discuss next is to avoid this front loading when the lessee doesn’t attain the usual risks and rewards of ownership and just “rents” the asset for a while. 42 Output measures such as units produced or input measures such as hours used might provide a better indication of the reduction in some leased assets. The lessee incurs an expense as it uses the asset.
Spiceland_Inter_Accounting8e_Ch15
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