CHAPTER 15 Leases 925 expense being the same for all four years and equal to what would have been recognized using operating lease accounting. Illustration 15–25D compares the front-loading effect of a Type A lease with the straight-line effect of a Type B lease. Type A Lease Financing Approach Interest Expense Amortization Expense Total Expense 2016 24,869 87,171 112,040 2017 17,355 87,171 104,526 2018 9,091 87,171 96,262 2019 0 87,171 87,171 51,315 348,685* 400,000* Type B Lease Straight-Line Approach Interest Expense Amortization Expense Total Expense 24,869 75,131 100,000 17,355 82,645 100,000 9,091 90,909 100,000 0 100,000 100,000 51,315 348,685 400,000 *Adjusted for rounding of other numbers in the schedule. Illustration 15–25D Comparison of Lessee’s Expense Recognition between Type A and Type B Leases It’s the amortization of the leased asset that differs under a Type A lease from a Type B lease. In a Type A lease, the lessee amortizes its right-of-use asset on a straight-line basis. In a Type B lease, on the other hand, it’s the total lease expense, not the amortization component, that’s a straight-line amount. To make that happen, we “plug” the amortization as the difference between the desired straight-line amount and the interest component as we saw demonstrated in Illustration 15–25D . REPORTING LEASE EXPENSE AND LEASE REVENUE After recording these entries for Sans Serif, the lessee, will have two lease-related expenses— interest expense and amortization expense. However, the lessee combines these two accounts into a single lease expense and reports a single $100,000 amount each year in its income statement. This is consistent with the key objective of reporting a straight-line lease expense for a Type B lease. In a Type A lease, the lessee will report interest expense and amortization expense separately in the income statement. First LeaseCorp, the lessor, has only a single lease revenue account in a Type B lease and reports that straight-line amount, $100,000, each year in its income statement. In a Type B lease, the lessee combines interest expense and amortization expense to report a single lease expense in the income statement. Additional Consideration If the annual lease payments are at the end of each year rather than the beginning of each year, the present value of the payments would be: $100,000 3 3.16987* 5 $316,987 Lease Payments Lessor’s cost *Present value of an ordinary annuity of $1: n 5 4, i 5 10%. The amortization schedule and journal entries would be: (continued) Payments Effective Interest Decrease in Balance Outstanding Balance (10% 3 Outstanding balance) 1/1/16 316,987 12/31/16 100,000 .10 (316,987) 5 31,699 68,301 248,685 12/31/17 100,000 .10 (248,685) 5 24,869 75,131 173,554 12/31/18 100,000 .10 (173,554) 5 17,355 82,645 90,909 12/31/19 100,000 .10 ( 90,909) 5 9,091 90,909 0 400,000 83,013 316,987
Spiceland_Inter_Accounting8e_Ch15
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