On January 1, 2010, Green Dog Electronics leased a factory building under a 10- year lease. The non-cancellable lease required annual lease payments of $ 250,000 on January 1 of 2010 through 2019. The lease term ends on December 31, 2019. The factory building was estimated to have a 30-year life and a fair value of $ 3,000,000 on January 1, 2010. The lease agreement does not transfer ownership of the building, nor does it contain a bargain purchase option. The lease agreement does not include a guaranteed or unguaranteed residual value. Green Dog uses a 10% interest rate to compute the present value of the lease payments.
On January 1, 2016 ( before the annual lease payment was made), Green Dog and the lessor agreed to shorten the life of the lease so that the lease agreement would terminate two years early on December 31, 2017. The two remaining lease payments were increased to $ 300,000. Because the factory building is customized, the market rate for a lease of this nature is difficult to determine. Green Dog estimates that the market rate has increased between 10 and 15% since the inception of the lease. The fair value of the building on January 1, 2016, is $ 1,500,000.
Using the Codification for support, determine how you would record the changes in the lease agreement on January 1, 2016. Provide any necessary journal entries.