# Lessees incremental borrowing rate on january 1 20x4

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Lessee’s incremental borrowing rate on January 1, 20x4 is 11%.Analysis:The lease modification doesnot qualifyas a separate lease because the criteria are not met.Accordingly, it is accounted for asremeasurement of the existing lease liability and right-of-use-asset.Step 1:Lessee reduces the carrying amounts of the existing right-of-use asset and lease liability inproportionto the decrease inthe scope of the lease, i.e., from 1,000 to 500 sq.m. or 50%.January 1, 20x4Dr. Lease liability (169,005 x 50%)P84,503Cr. Right of use asset (360,478 x 2/5) x 50%P72,096Cr. Gain12,407Step 2:Remeasurement:Annual rent payable at each year endP60,000PV of ordinary annuity of 1 @11%, n=21.71252Present value of lease paymentsP102,751Lease liability before modification (see table above)P169,005Adjustment (see entry in Step 1 above)(84,503)TotalP84,502Lease liability after modificationP102,751Increase in liabilityP18,249January 1, 20x4
Leases (Batch May 2020)Page 49 of 79Dr. Right-of-use assetP18,249Cr. Lease liabilityP18,249Case 3: Full terminationOn January 1, 20x4, Lessee and Lessor terminate the lease and Lessor sells the entire building to the Lessee forP2,000,000Step 1: Lessee reduces the carrying amounts of the existing right-of use asset and lease liabilityin proportionto the decrease inthe scope of the lease, i.e., full termination or 100%.January 1, 20x4Dr. Lease liabilityP169,005Cr. Right-of-use-asset (P360,478 x 2/5)P144,191Cr. Gain24,814Step 2:Lessee records the purchase as follows:January 1, 20x4Dr. BuildingP2,000,000Cr. CashP2,000,000LEASE MODIFICATIONProblem 1:AAA Company entered into a lease of building on January 1, 2020 with the following information:Annual rental payable at the end of each yearP600,000Lease term5 yearsUseful life of building20 yearsImplicit interest rate9%PV on an ordinary annuity of 1 at 9% for 5 periods3.890The lease contained an option for the lessee to extend the lease for a further 5 years.At the commencement date, the exercise of the extension option isnot reasonably certain.After 3 years on January 1, 2023, the lessee decided to extend the lease for a further 5 years.New annual rental payable at the end of each yearP800,000New implicit interest rate12%PV of an ordinary annuity of 1 at 12% for 5 periods3.605PV of 1 at 12% for 2 periods0.797PV of an ordinary of 1 at 12% for 2 periods1.690Required:1.Preparea table of amortization for 2020, 2021 and 2022.2.Prepare journal entries for 2020.3.Remeasure the lease liability on January 1, 2023.4.Prepare a new table of amortization from 2023 to 2029.5.Prepare journal entries for 2023.
Requirement No. 1Initial MeasurementYearAnnual PaymentsInterest Expense AmortizationCarrying amountAnnual Payments600,0001 01 2020---2,334,000PV on OA of 1 at 9% for 5 periods3.89031 12 2020600,000210,060389,9401,944,060Total2,334,00031 12 2021600,000174,965425,0351,519,02531 12 2022600,000136,712463,2881,055,738Requirement No. 2Journal EntriesNew Amortization TableJan 1 2020Requirement No. 4Right of Use Asset2,334,000YearAnnual PaymentsInterest Expense AmortizationCarrying amountLease Liability2,334,0001 01 2023---3,312,54831 12 2023600,000397,506202,4943,110,054Dec 31 202031 12 2024600,000373,206226,7942,883,260Interest Expense210,06031 12 2025800,000345,991454,0092,429,251Lease Liability389,94031 12 2026800,000291,510508,4901,920,762Cash600,00031 12 2027800,000230,491569,5091,351,25331 12 2028800,000162,150637,850713,403Depreciation Expense466,80031 12 2029800,00086,597713,403-Accumulated Depreciation466,800*=2,334,000/5 lease term no purchase option lease term vs useful life which ever is shorterRequirement No. 5Right of Use Asset2,334,000Journal EntriesLease Term5Jan 1 2023Annual Depreciation466,800Right of Use Asset2,256,810Lease Liability2,256,810Carrying Amount as of Dec 31, 20232,334,000Accumulated Depreciation of 3 years1,400,400Dec 31 2023Carrying Amount as of Dec 31, 2023933,600Interest Expense397,506Requirement No. 3Lease Liability202,494Remeasurement of Lease LiabilityCash600,000Old Lease Payment of 600,000600,000PV of an ordinary annuity of 1 at 12% for 2 periods1.690Depreciation Expense455,773Remaining Old Lease Term1,014,000Accumulated Depreciation455,773New Lease Payment of 800,000800,000Right of Use Asset3,190,410PV of an ordinary annuity of 1 at 12% for 5 periods3.605Lease Term 2yrs plus 5 yrs72,884,000Annual Depreciation455,773PV of 1 at 6% for 2 periods0.797Present Value of Lease Payment for new lease term2,298,548Lease Liability as of Jan 1, 20233,312,548Carrying Amount of Old Lease Liability1,055,738Increase In Lease Liability2,256,810Carrying Amount of Right of Use Asset933,600Increase In Right of Use Asset2,256,810New Carrying Amount of Right of Use Asset3,190,410
Leases (Batch May 2020)Page 50 of 79Problem 2:On January 1, 2020, BBB Company entered into a 5-year lease of a floor of a building with the following terms:Annual rental for the first two years payable at the end of each yearP200,000Annual rental for the next three years payable at the end of each year300,000Initial direct cost paid by lessee100,000Leasehold improvement250,000Present value of restoration cost required by contract at 8%50,000Useful life of building20 yearsImplicit interest rate8%PV of an ordinary annuity of 1 at 8% for two periods1.783PV of an ordinary annuity of 1 at 8% for three periods2.577PV of 1 at 8% for two periods0.857Required:1.Compute the lease liability on January 1, 2020.2.Compute the cost of right of use asset.3.Compute the depreciation for 2020.4.Prepare a table of amortization5.Prepare journal entries for 2020.6.Prepare the journal entry on December 31, 2022.
Leases (Batch May 2020)

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Term
Spring
Professor
N/A
Tags
Dr Lease, Dr Lease Liability