Question

GASB 87 provides a new framework for accounting for leases under the principle that leases are financings. No longer will leases be classified between capital and operating. Lessees will recognize an intangible asset and a corresponding liability . The liability will be based on the payments expected to be paid over the lease term, which includes an evaluation of the likelihood of exercising renewal or termination options in the lease. City of El Paso decided to implement early adoption in 2019. It just sign 3 years lease for an office building with a remaining Economic life of 20 years. The building has a fair market value of $555,018 million. Based on an interest rate of 4 percent, annual lease payments are set at $200,000, the amount required to liquidate a $555,018 million, 3 year, 4 percent loan in equal annual installments. Total Expenditure reported in Governmental Fund statement for City of El Paso at the end of Year 1 will be Answers:

a. Approximately $22,201

b. Approximately $200,000

c. Approximately $555,018 -lease asset expenditure

d. Approximately $755,018

Answer 1

Given, City of EI Paso signs 3 years of lease for an office building with remaining economic life of 20 years. The building has a fair market value of $555,018.
Annaul Lease payment $200,000 and interest rate is 4%

As per GASB 87, the lessee at the commencement of the lease term recognise the lease asset and lease liability unless the lease is less than 1 year which is a short term.

The lease liability should be measured at present value i.e., the fair market value. As the payments are made the lease liability should be reduced to the extent of the payment made toward the principle amount.

The Annaul lease payment also includes the interest expense on the lease liability.

In the given case, the annual lease payment is $200,000.

As the payment is made at the end of the year, the interest should be paid on the total lease liability of $555,018.

Interest Amount = $555,018 * 4% = $22,200.72 or approximately $22,201

The lease liability should be reduced by $200,000 - $22,201 = $177,799

So , City of EI should reduce the lease liability by $177,700 and report the expense on Income statement as $22,201.

Hence, Option a. Approximately $22,201 is Correct.