Leases 1

Lease

A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration

Finance lease

one or more of the 5 criteria are met

Lessees should use what rate for the discount rate

implicit rate

If the implicit rate is not known by the lessee than the lessee should use its own

incremental borrowing rate

economic life threshold

75%

PV threshold

90%

Operating Lease JE to record lease contract

Dr. Right-of-use asset
Cr. Lease Liability

Operating Lease JE for payment on lease

Dr. Lease Liability
Cr. Cash

Operating lease JE for accruing interest on lease

Dr. Lease Expense
Cr. Lease Liability (interest exp)
Cr. ROU Asset (depreciation exp)

PMT at END of year

Current Liability = current payment - next year interest

PMT at BEG of year

Current Liability = current payment

If there is a bargain element or title/ownership transfer then you amortize over the…

asset life instead of lease term

Financing lease JE for recording lease contract

Dr. Right-of-use asset
Cr. Lease Liability

Financing lease JE for cash payment on lease

Dr. Lease Liability
Cr. Cash

Financing Lease JE to accrue interest on the lease

Dr. Interest Exp
Cr. Lease Liability

Financing Lease JE on amortization of the ROU asset

Dr. Amortization Expense
Cr. ROU Asset

After a transfer of ownership/bargain element

reclassify ROU asset as equipment
Dr. Equipment
Cr. ROU Asset