You are Adam Rogers, CPA. The president of one of your clients, Relient Corporation, emailed you the following message:

Adam,

I was at a conference today and they were talking about the new lease regulations and how that may impact our financial statements. I know that we have a couple of leases, one that we record as a liability and one that we do not. How will this new lease requirement impact us? When does this go into effect? Will we need to restate prior financial statements? Are there any retrospective entries that we have to make? If so, what are they and when do we need to record them? What do we need to do to implement this change?

Don Collizi

President, Reliant Corporation

Upon investigation of Relients records, you found that Relient had had two leases. One that is currently being accounted for as a capital lease and one being treated as an operating lease (under current standards).

The capital lease was for equipment. The lease started in 2018 and was a 5-year lease of annual lease payments of $50,000, starting on January 1, 2018. The lease also had a bargain purchase option for $20,000 at the end of the lease. The equipment had a useful life of 6 years and Relient uses the straight-line method of depreciation. The implicit interest rate for this lease was 6%.

The operating lease was a 15-year lease for their facilities that started on January 1, 2015. The lease consisted of annual rental payments, starting on January 1, 2016 of $60,000. When they started the lease in 2016, the expected useful life of the facility was 30 years. Relient imputed interest rate is 8%.

Required:

Reply to Don Collizi. Write a memo or letter (use proper format for a letter or memo) to Don explaining the new lease requirements as they apply to Relient. Be sure to include the following:

1. Assuming adoption of update 2016-02 in 2020, what journal entries will need to be made in 2020 for the transition to the new lease standard?