Question

Please show all calculations.

Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the following:

Lease term	Five years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter
Annual payments, beginning at lease commencement and annually thereafter	Commencement – $25,000 Year 2 – $26,000 Year 3 – $27,000 Year 4 -- $28,000 Year 5 -- $29,000
Discount rate	4.0%
Present value (PV) of lease payments	$124,645

Complete the following table to show the impact on each year of Lessee’s income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1.

	Initial	Year 1	Year 2	Year 3	Year 4	Year 5
Cash lease payments
Income statement:
Periodic lease expense (straight-line)
Prepaid (accrued) rent for period
Balance sheet at end of year:
Lease liability
ROU asset:
Lease liability
Adjust: Accrued rent (cumulative)
Unamortized direct initial costs
ROU asset

Answer 1

						($)
	Initial	1	2	3	4	5	Total
Cash Lease Payment	5000	25000	26000	27000	28000	29000
Pv @ 4%	1	0.961538	0.924556	0.888996	0.854804	0.82192711
Pv	5000	24038.46	24038.46	24002.9	23934.52	23835.8861	124850.2
Income statement
Straight lining Impact		27000	27000	27000	27000	27000
Prepaid accrued rent		-2000	-1000	0	1000	2000
Balance sheet		-20206
Lease Liability	119850.2	99644.24	77630.01	53735.21	27884.62	0	added intrest exp @4%
ROU Asset	124850.2	99880.23	74910.23	49940.23	24970.23	0	Depreciation =124850/5
Accrued rent	0	-2000	-3000	-3000	-2000	0	24970
Unamortized IDC	5000	4000	3000	2000	1000	0	1000
Initial direct cost being a part of asset therefore it will amortize along with the ROU Asset over the period of lease
as per the standard lessee to include IDC in initial measurement of ROU asset and depreciate cost over lease term
Journal Entry
ROU Asset	124850.2
To Lease Liability	124850.2
Intrest expense	4794.009
TO Lease Liability	4794.009
Lease Liability	25000.01	(119850-99644)+4794
TO Bank	25000.01
Depreciation	24970
TO ROU Asset	24970