Question

Short Answer - Millie
Must Include Supporting Documentation in File Upload portion of exam. Please label page as "Millie."

On January 1, 2019, Millie Manufacturing leased a building for use in its operations from Dallas Realty. The 7-year, noncancellable lease requires annual lease payments of $22,000, beginning January 1, 2019, and at each January 1 thereafter through 2025.

The lease payments include payments for common area maintenance. The observable standalone lease price for the building is $20,000 and the observable standalone price for the common area maintenance is $5,000. Millie elects to account for each lease component and associated non-lease components separately using the proportionate method.

The lease agreement does not transfer ownership, nor does it contain a purchase option, and has no guaranteed residual value. The building has a fair value of $95,000 and an estimated remaining life of 8 years. Dallas Realty's implicit rate of 10% is known to Millie.

Required for Millie (Lessee) - round all final answers to nearest whole dollar.

a. How should Millie classify the lease?   
b. At what value should Millie record the right-of-use asset in the initial lease measurement (before the first payment is made)?   

In your supporting documentation, show the appropriate journal entry to support your answer in part (b.) Also show all of the inputs used in your PV calculation.

c. How much interest expense and amortization expense should Millie show on her December 31, 2019 income statement?
Interest expense: $
Amortization expense: $

d. What is the carrying value of the ROU Asset on Millie's December 31, 2019 balance sheet?   

Answer 1