CHAPTER 15 Leases 923 payable and amortization expense for its right-of-use asset. In its income statement, the lessee combines these two accounts into a single lease expense and reports a single straight-line amount each period. Let’s look first at the interest component. Sans Serif determines interest on the lease payable the same way as in a Type A lease as demonstrated in Illustration 15–25A . Illustration 15–25A Journal Entries for the First and Second Lease Payment First Lease Payment (January 1, 2016) Lease payable .................................................................................... 100,000 Cash (lease payment) ..................................................................... 100,000 Second Lease Payment (December 31, 2016) Interest expense 10% 3 ( $348,685 2 100,000 ) ................................ 24,869 Lease payable (difference) ................................................................. 75,131 Cash (lease payment) ..................................................................... 100,000 Lease payable $ 348,685 (100,000) 1st payment $ 248,685 (75,131) 2nd payment $ 173,554 The amortization schedule in Illustration 15–25B shows how the lease balance and the effective interest change over the four-year lease term. Illustration 15–25B Lease Amortization Schedule The first lease payment includes no interest. The total of the cash payments ($400,000) provides for: 1. Payment for the equipment’s use ($348,685). 2. Interest ($51,315) at an effective rate of 10%. Payments Effective Interest Decrease in Balance Outstanding Balance (10% 3 Outstanding balance) 1/1/16 348,685 1/1/16 100,000 100,000 248,685 12/31/16 100,000 .10 (248,685) 5 24,869 75,131 173,554 12/31/17 100,000 .10 (173,554) 5 17,355 82,645 90,909 12/31/18 100,000 .10 ( 90,909) 5 9,091 90,909 0 400,000 51,315 348,685 In the next section, we see how the right-of-use asset is amortized to provide a straightline total lease expense of $100,000 each year. RECORDING AMORTIZATION OF THE RIGHT-OF-USE ASSET We can say that recording lease expense in a Type A lease should reflect (a) the right to use the asset (amortization) plus (b) the financing of that right (interest). On the other hand, in a Type B lease, recording lease expense should simply reflect straight-line rental of the asset during the lease term. The way the lessee does that is to determine interest expense as in Illustration 15–25A and 15–25B above, but then determine amortization of the right-of-use asset as the amount needed to cause the total lease expense (interest plus amortization) to be an equal, straight-line amount over the lease term. Illustration 15–25C shows us how total lease expense (amortization plus interest) for Sans Serif will equal $100,000 each year over the lease term. The lessor reports lease revenue on a straight-line basis for a Type B lease as well, but because it records no entry at the beginning of the lease, it simply records the annual $100,000 lease receipts as lease revenue. This, too, is demonstrated in the illustration. The lessor in a Type B lease does not record a lease receivable at the beginning of the lease and does not remove from its balance sheet (derecognize) the asset being leased. With no receivable to accrue interest, the First LeaseCorp simply records straight-line revenue as a single lease revenue amount equal to the $100,000 lease payments and equal to the $100,000 amount the lessee reports as lease expense as demonstrated in Illustration 15–25C . We should take note of several aspects of these journal entries. First, at the beginning of the Type B lease, as in a Type A lease, the lessee records an asset for the right to use the equipment for four years as well as an obligation to pay for that right. However, in a Type B lease, unlike in a Type A lease, the lessor does not record a lease receivable, nor does it In a Type B lease, the lessee records interest the normal way and then “plugs” the right-ofuse asset amortization at whatever amount is needed for interest plus amortization to equal the straight-line lease payment. A right-of-use asset is recorded by the lessee at the present value of the lease payments.
Spiceland_Inter_Accounting8e_Ch15
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