924 SECTION 3 Financial Instruments and Liabilities Illustration 15–25C Type B Lease—Determining Lease Expenses and Revenue Jan. 1, 2016 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Sans Serif (Lessee) Right-of-use asset 348,685 Lease payable 348,685 Interest expense 0 24,869 17,355 9,091 0 Lease payable 100,000 75,131 82,645 90,909 0 Cash 100,000 100,000 100,000 100,000 0 Amortization expense w 75,131 82,645 90,909 100,000 Right-of-use asset 75,131 82,645 90,909 100,000 Total lease expenses each year 5 100,000 100,000 100,000 100,000 First LeaseCorp (Lessor) No entry to record receivable or to derecognize asset remove the asset from its balance sheet. Instead, each $100,000 lease payment it receives is viewed as lease revenue for letting the lessee use the equipment. Second, straight-line recognition in the income statement is the key difference when recording a Type B lease. This avoids the so-called front loading of lease expense and lease revenue that occurs in a Type A lease. The lessor records lease revenue as $100,000 in each of the four years, and the lessee also records lease expense as $100,000 in each of the four years. But when looking at the journal entries in Illustration 15–25C , you’ll see that the lessee’s lease expense is separated into two parts. One part is the interest on the lease payable, which is calculated in the same way as we do for Type A leases. (See the amortization schedule in Illustration 15–24B for confirmation.) The second component of lease expense is the amortization of the right-of-use asset. This part requires some additional explanation. As is apparent in the journal entries, we don’t simply amortize the lessee’s right-of-use asset on a straight-line basis as we did for a Type A lease. To understand why, we need to remember that our primary objective here is to cause the total lease expense to be the straight-line amount of $100,000 each year. We can ensure that happens by having the amortization component be simply a “plug” amount that is the difference between $100,000 and the interest component determined first. So, for instance, when we determine the interest the first year to be 10% of $348,685 2 100,000, 44 or $24,869, we can simply subtract that amount from $100,000 to get the amortization amount of $75,131. Notice, too, that we reduce both the asset and the liability by the same amount. In 2016, $75,131 is the amortization of the right-of-use asset, and it also is the reduction of the lease liability. The liability is accounted for the same way as in a Type A lease, and the amortization is adjusted to ensure that the asset is equal to the liability. This results in the total lease The lessor retains the equipment on its books. In a Type B lease, the lessee records lease expense and the lessor records lease revenue on a straight-line basis over the lease term. 44 Remember, the interest for 2016 is the effective rate times the original liability reduced by the first $100,000 paid on the first day. The lessee’s lease expense is separated into two parts, interest and an amortization amount that is a “plug” to cause the total expense to be $100,000 each year. Cash 100,000 100,000 100,000 100,000 Deferred revenue t 100,000 100,000 100,000 100,000 Deferred revenue t 100,000 100,000 100,000 100,000 Lease revenue 100,000 100,000 100,000 100,000 Depreciation expense ($479,079 / 6) C 79,847 79,847 79,847 79,847 Accumulated depreciation 79,847 79,847 79,847 79,847 wplug to cause the total lease expense to equal the straight-line amount: $100,000 minus interest t When the $100,000 is received at the beginning of the lease year, it is not yet earned and should be recorded as deferred lease revenue. When it has been earned by the end of the year, it becomes lease revenue. C also in 2020 and 2021 (rounded).
Spiceland_Inter_Accounting8e_Ch15
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