Coming Changes to Lease Accounting F09

Period payment interest principal adj for renewal

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Period Payment Interest Principal Adj for Renewal Balance Depr Expense 0 182,223 1 35,000 14,578 20,422 161,801 26,032 2 35,000 12,944 22,056 139,745 26,032 3 35,000 11,180 23,820 115,924 26,032 4 35,000 9,274 25,726 57,791 32,407 52,064 5 35,000 2,593 32,407 - 0 52,064 6 0 (0) 0 7 0 (0) 0 TRUE 175,000 50,568 124,432 182,223
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You must adjust the liability to match PV of remaining estimated cash flows Entry for catch-up method Lease obligation 53,510      Right-to-use asset 53,510 In other words, the liability suddenly got smaller “Right to use asset” is the name for “Leased Asset”  account – some debate as to whether it is PP&E or an  intangible asset Depreciation “jumps” to $52,064 for the last two  years of the lease
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You must adjust the liability to match PV of remaining estimated cash flows Entry for alternate catch-up method (my own  recommentation) Lease obligation 53,510    Interest expense 11,032    Right-to-use asset  42,478 Depreciation expense 5,751 Accumulated depreciation 5,751   Depreciation “jumps” only a little to $27,949 for the  last two years of the lease. This method ends with  the PVELP based on 5 year lease term in the asset  and acc’d depreciation accounts.
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FASB’s example 3 Page 30 in the Discussion Paper Same except the lessee does NOT initially plan to  renew the lease so the initial PVELP is CU 139,700  (5 years of CU 35,000 payments at 8%). At the end of the third year, the lessee decides the  lease term will be 7 years
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Period Payment Interest Principal Balance Depr 0 139,745 1 35,000 11,180 23,820 115,924 27,949 2 35,000 9,274 25,726 90,198 27,949 3 35,000 7,216 27,784 62,414 27,949 4 35,000 4,993 30,007 32,407 27,949 5 35,000 2,593 32,407 0 27,949 6 0 (0) 0 7 0 (0) 0 175,000 35,255 139,745 139,745 Schedule based on intentions at inception of lease:
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Revised schedule to reflect change from 5 to 7 yr lease term Period Payment Interest Principal Adj for Renewal Balance Depr Expense 0 139,745 1 35,000 11,180 23,820 115,924 27,949 2 35,000 9,274 25,726 90,198 27,949 3 35,000 7,216 27,784 (53,510) 115,924 27,949 4 35,000 9,274 25,726 90,198 27,352 5 35,000 7,216 27,784 62,414 27,352 6 35,000 4,993 30,007 32,407 27,352 7 35,000 2,593 32,407 0 27,352 245,000 51,745 193,255 193,255
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You must adjust the liability to match PV of remaining estimated cash flows Entry for catch-up method Right-to-use asset 53,510     Lease obligation 53,510 In other words, the liability just got higher.   One could debit Acc'd Depreciation instead of the 
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