You are Janet Wilt, CPA. The president of one of your clients, Boarshead Corporation, a small private company, emailed you the following message on January 12, 2022:

Janet,

I was at a conference today and they were talking about the new lease regulation 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 make adjustments to our 2021 financial statements for the new regulation? 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, Boarshead Corporation

Upon investigation of Boarsheads records, you found that Boarshead had had two leases. One that is currently being accounted for as a capital lease and one being treated as an operating lease (under the old standard).

The capital lease was for equipment. The lease started in 2019 and was a 5-year lease of annual lease payments of $50,000, starting on January 1, 2019. 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 Boarshead 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 2015, they expected useful life of the facility was 30 years. Boarshead imputed interest rate is 8%.

You also found that the January 1, 2022 payments for both leases were made on December 28, 2021.

4. In 2021, what entries will need to be recorded to record the payments of the leases and any year-end adjusting entries related to the lease and lease asset? (Again assume that payment for January 1, 2022 is made in late December, before the January 1, 2022 due date.) Show your client the entries that will be made when the payments are made and any year-end adjusting entry that is needed.