Question

Boerne Inc entered into a one-year contract to lease equipment from Spring Branch Leasing on January 1, 2018. The fair value of the leased equipment at the inception of the lease was $600,000. Lease term 1 year (4 quarterly periods) Quarterly lease payments $30,000 at Jan. 1, 2018, and at April 1, July 1, and Oct 1. Economic life of asset 5 years Interest rate charged by the lessor 10%

Required: Boerne elected the short-term lease option. Appropriate adjusting entries are made annually. Prepare appropriate entries for Chance from for the first two quarters of 2018.

Answer 1

ASC 842, Leases, was added by ASU 2016-02 on February 25, 2016. It is effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, ASC 842 will be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption will be permitted for all entities.

               

Operating lease accounting - as the risks and rewards of ownership of an asset are not transferred in the case of an operating lease, an asset is not recognized in the statement of financial position. Instead rentals under operating leases are charged to the statement of profit or loss on a straight-line basis over the term of the lease, any difference between amounts charged and amounts paid will be prepayments or accruals.

Appropriate entries for Chance from for the first two quarters of 2018.

1 Jan 2018:

Dr Lease expense (statement of profit or loss)   $30,000

Cr Bank                                                                                                 $30,000

1 Apr 2018:

Dr Lease expense (statement of profit or loss) $30,000

Cr Bank                                                                                               $30,000