Question

On January 1, 2020, Nelson Co. leased a building to Wise Inc. The relevant information related to the lease is as follows.

1.		The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,500,000 (unguaranteed).
2.		The leased building has a cost of $4,000,000 and was purchased for cash on January 1, 2020.
3.		The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
4.		Lease payments are $275,000 per year and are made at the beginning of the year.
5.		Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise.
6.		Both the lessor and the lessee are on a calendar-year basis.

Note: The answer is NOT $3000.

If Wise paid $30,000 to a real estate broker on January 1, 2020, as a fee for finding the lessor, what is the initial measurement of the right-of-use asset? Right-of-use asset Right-of-use asset 3000 3000 $

Answer 1

Calculation of Present Value of Minimum Lease Payments
Year	Installment Amount	Present Value Factor @8%	Present Value of Lease Liability
01-01-2020	2,75,000	1	2,75,000
01-01-2021	2,75,000	0.925925926	2,54,630
01-01-2022	2,75,000	0.85733882	2,35,768
01-01-2023	2,75,000	0.793832241	2,18,304
01-01-2024	2,75,000	0.735029853	2,02,133
01-01-2025	2,75,000	0.680583197	1,87,160
01-01-2026	2,75,000	0.630169627	1,73,297
01-01-2027	2,75,000	0.583490395	1,60,460
01-01-2028	2,75,000	0.540268885	1,48,574
01-01-2029	2,75,000	0.500248967	1,37,568
		Total	19,92,894
Calculation of Right of use Asset
Right of Use asset = Present Value of Minimum lease payments + Indirect costs incurred to obtain lease
Right of use asset = 19,92,894$+30,000$ = 20,22,894$