2.

Chapter 12: Lessee Accounting under ASC 842

Assume that Frozen Seafood, Inc. (lessee) and Generators-R-Us, Inc. (lessor) sign a lease agreement dated January 1, 2018. The contract specifies that

lessor will grant lessee the right-of-use to one of its standard generators at lessee's facility. The generator will supply lessee's emergency power needs.

Attributes of the lease agreement are:

Deemed operating (not finance).

Non-cancelable.

Four year term.

Contains no renewal options and, hence, possession of generator reverts to lessor at the end of the term.

Additionally:

Lessor's implicit interest rate is 7 percent (%), of which lessee is aware.

The generator has a cost and fair value of $80,000, economic useful life of 8 years, and unguaranteed residual value of $40,000.

Recommended resources:

Week Six > Instructional Videos folder > "Accounting for Operating Leases" video

Exhibit 12.9 of text

Appendix A of text: Time value of money tables

General instructions: Complete all emboldened cells. For dollar figures, indices, or ratios, use two decimal places. For present value factors (PVF), use five decimal places.

a.

Determine lessee's annual payment.

PVF

Fair value of leased equipment

$ 80,000.00

Less: PV of unguaranteed residual value of

$ 40,000.00

4 years, 7%

Amount to be recovered by lessor through lease payments

Annual lease payments, beginning-of-year

4 years, 7%

3.62432

b.

Provide lessee's journal entry to record (1) the operating lease and (2) first payment.

DR

CR

(1)

Right-of-Use Asset

Lease Liability

(2)

Lease Liability

Cash

c.

Prepare an amortization schedule for the lease.

A

B

C

D

E

F

G

F - B

sum of column A lease term

previous G - E

Date

Annual Lease Payment

Interest on Liability

Principal Reduction

Lease Liability Balance

Amortization of Asset

Annual Operating Lease Expense

Right of Use Asset Balance

1/1/2018

-

-

-

49,484.00

-

-

49,484.00

1/1/2018

-

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Totals

d.

Journalize Warehouse's lease expense on December 31, 2018.

DR

CR

Lease Expense

Right-of-Use Asset

Lease Liability

e.

Journalize the second lease payment on January 1, 2019.

Lease Liability

Cash