Applying New Lease Accounting Standards for Operating Leases

On January 1 of the current year, CCH Corporation entered into the following lease contract. Based on the facts, CCH Corporation classifies the lease as an operating lease.

Details of lease contract
Leased asset	Office space
Lease term	5	years
Annual lease payment	$115,487
Upfront fees	$10,000
Cost of debt capital	5%

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

a. Explain how the facts support the classification of the lease as an operating lease. Value of the leased asset is being conveyed to CCH

b. Determine the amount of the lease liability that CCH will add to its balance sheet at the inception of the lease.

	Amount of lease liability
	499,998

c.

1. What amount will be added to the balance sheet as an asset?

	Amount added as an asset
	509,998

2. What will CCH Corporation call the asset on the balance sheet? AnswerApartment buildingLease assetOperating assetRight-of-use asset

d. Prepare a lease amortization schedule that shows the interest and principal portions of each lease payment.

			Implicit Interest	Lease Amortization	Lease Liability, End
		Lease Liability,	(Lease Liability,	(Lease payment	(Lease Liability, Start
	Year	Start	Start x cost of debt)	Implicit interest)	Lease Amortization)
	1	499,998	25,000	90,487	409,511
	2	409,511	20,476	95,011	314,500
	3	314,500	15,725	99,762	214,738
	4	214,738	10,737	104,750	109,988
	5	109,988	5,499	109,988	0

e. Use the financial statement effects template to record (a) the lease inception and (b) lease payment for year one and for (c) year two of the lease term. Also show the asset and lease amortization for those same two years.

Note: For each account category, indicate the appropriate account name. Enter "N/A" for any account category that is not used for a given transaction. Note: Indicate a decrease in an account category by including a negative sign with the amount.

	($ in millions)	Balance Sheet									Income Statement
	Transaction	Cash	+	Noncash Assets	=	Liabilities	+	Contrib. Capital	+	Earned	Revenues		Expenses	=	Net
		Asset								Capital					Income
	(a)	-10000		509,998	=	499,998		0		0	0		0		0
		Cash		Right-of-use asset		Lease liability		N/A		N/A	N/A		N/A
	(b)	-115,487		Answer	=	-90,487		0		Answer	0		Answer		Answer
		Cash		Right-of-use asset		Lease liability		N/A		Retained earnings	N/A		Rent Expense
	(c)	-115,487		Answer	=	-95,011		0		Answer	0		Answer		Answer
		Cash		Right-of-use asset		Lease liability		N/A		Retained earnings	N/A		Rent expense

f. At the end of the current year, what additional disclosure would CCH make in its footnotes pertaining to the four remaining lease payments?

		December 2020
	2021	115,487
	2022	115,487
	2023	115,487
	2024	115,487
	2025	0
	Thereafter	0
	Total undiscontinued lease payments	461,948
	Imputed interest	-52,437
	Total Operating lease liability	409,511
	Weighted average remaining lease life in years	4%
	Weighted average discount rate	5%