The FASB Codification added an entirely new section (842) to describe how to record leases. In this section, the FASB gave use some illustrations to show us how to apply the new rules. One example gives the illustration of a Lessee Recognition and Subsequent measurement of an operating lease (looking for illustration example 4). This example has six paragraphs or steps described. This illustration describes the amounts that should be shown on the balance sheet
Requirement: Show the journal entries needed to record the first two years of the operating lease as described in the codification.
Example 4-Recognition and Initial and Subsequent Measurement by a Lessee in an Operating Lease 25-2 through 25-1. Lessee incurs inital drect costs of 15.000. 5542 Prouling Content? ? At the comme coment date, Lessee recerrs a 510,000cath payment from Lessor that leasee accounts for as a lease incentive. Lessee meanies the leate liabilify at the prisent value of the 10 remaining lease soyments (510.000 in rear 1 , increasing by 5 percent each year thereafter), disceunted at the rate of 6 percent, which is s00,434. Lessee also measuret a nght-of-use asset of 305.434 fohe indial meaturement of the lease liabilit + the intial direct cests of 35.0001 the lease incentive of sto.000). 5543 Pendias Gobleat ? During the frat vear of the iease. Lesset determines the remaining cost of the lease as the sum of the following: a. The total lease payments of 5115,779 (the sum of the 10 escaiating payments to Lessor during the lease term of 5125.779 - the lease incentive paid to Lesiee at the cemmencement date of s10,000) b. The total incial direct costs attributable to the iease of $5,000. The amount of the remaining lease cost is therefare 5120,779 (s1s5,779 +55,000 ). Consequently, Lessee determines that the single lease cost to be recegnized every year throughoot the lease term is 512.078(5120.779+10 years). This assumes that there are no remeasurements of the lease labolity or mocificanonv to the lease thiouahout the Example 4-Recognition and Initial and Subsequent Measurement by a Lessee in an Operating Lease 25-2 through 25-1. Lessee incurs inital drect costs of 15.000. 5542 Prouling Content? ? At the comme coment date, Lessee recerrs a 510,000cath payment from Lessor that leasee accounts for as a lease incentive. Lessee meanies the leate liabilify at the prisent value of the 10 remaining lease soyments (510.000 in rear 1 , increasing by 5 percent each year thereafter), disceunted at the rate of 6 percent, which is s00,434. Lessee also measuret a nght-of-use asset of 305.434 fohe indial meaturement of the lease liabilit + the intial direct cests of 35.0001 the lease incentive of sto.000). 5543 Pendias Gobleat ? During the frat vear of the iease. Lesset determines the remaining cost of the lease as the sum of the following: a. The total lease payments of 5115,779 (the sum of the 10 escaiating payments to Lessor during the lease term of 5125.779 - the lease incentive paid to Lesiee at the cemmencement date of s10,000) b. The total incial direct costs attributable to the iease of $5,000. The amount of the remaining lease cost is therefare 5120,779 (s1s5,779 +55,000 ). Consequently, Lessee determines that the single lease cost to be recegnized every year throughoot the lease term is 512.078(5120.779+10 years). This assumes that there are no remeasurements of the lease labolity or mocificanonv to the lease thiouahout the