Question

**USE NEW 2017 FASB LEASE STANDARD**

Part 1

Required: In one or two sentences, summarize the main difference between IFRS vs. US lease accounting:

Part 2 (Application)

On January 1, 2017, a machine was purchased for $400,000 by Younger Leasing Co. The machine is expected to have a 10-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Juniper Inc. for 3 years on January 1, 2017, with annual rent payments of $69,560 due at the beginning of each year, starting January 1, 2017. The machine is expected to have a residual value at the end of the lease term of

$260,000, though this amount is unguaranteed.

Required:

US GAAP: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessarry 2017 journal entries related to the lease for Juniper.

US GAAP: What will Juniper report on the 2017 Balance Sheet regarding the lease?

IFRS: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessary 2017 journal entries related to the lease for Juniper.

IFRS: What will Juniper report on the 2017 Balance Sheet regarding the lease?

Summarize the differences between US GAAP and IFRS illustrated in this specific problem.

Answer 1

Part 1:

Under US GAAP, a lease is accounted for as a capital lease (financing lease) by the lessee if the lease satisfies one or more of the following criteria:

The lease transfers ownership of the property to the lessee by the end of the lease term.

The lease contains an option to purchase the leased property at a bargain price.

the lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.

The present Value of the rental and other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any investment tax credit retained by the lessor.

If none of the above criteria are met, the lessee accounts for the lease as an operating lease

Under IFRS, a lease is classified as a financing lease by the lessee if it transfers substantially all risks and rewards incident to ownership to the lessee

Part 2:

US GAAP accounting

Journal entries in the books of Lesses

* find PV of rental payments
(69,560 x 2.833339) = 197,091
- i=6%, n=3

1/1/17 - leasing of asset
Right-of-use asset Dr. $197,091
Lease liability Cr.                       $197,091

1/1/17 Rental payment
Lease liability Dr. $69,560
Cash Cr.                       $69,560

12/31/17
Lease expense Dr. $69,560
- Lease liability Cr.                    $7652
- right of use asset Cr. $61,908

* carrying value 1/1/17 after payment of lease (197,091 - 69,560) = 127,531
Interest on liability: (127,531 x 0.06) = 7,652

Reduction of lease liability (69,560 - 7,652) = 61,908

Journal entries in the books of Lessor

1/1/17
Machine Dr.      $400,000
Cash Cr.                       $400,000

Cash Dr.                       $69,560
Unearned revenue Cr.    $69,560

12/31/17
Unearned revenue Dr.    $ 69,560
Lease revenue Cr.                                  $69,560

Depreciation expense Dr.                      $40,000
Accumulated dep - leased asset Cr.       $40,000
* (400,000 / 10) = 40,000

IFRS

1/1/17 - leasing of asset
Right-of-use asset Dr. $197,091
Lease liability Cr.                       $197,091

Debit Profit or loss – Depreciation charge Dr.     $ 40,000

Accumulated depreciation of right-of-use asset $ 40,000

Profit or loss – Interest expense Dr. $11,825

Lease liability Cr.                                   $ 11,825

6% of 197,091