Question

Tyson, Inc. leases a piece of equipment from Holmes. The lease is for 5 years at an annual payment of $50,000. Tyson’s borrowing rate for the transaction of a similar length is 5.25%. The equipment has a 5-year economic life. The lease has no option to review and no guarantee of any residual value. The present value of the lease payments equals the fair value of the leased assets.

Please show all of the J/Es for the initial year to record the lease and related expenses and liability?

At the end of year 2 what is the account balance of the Right to Use Asset and the Lease Liability?

Answer 1

	Lessee Accounting:Tyson Company
	The leasee should use a single accounting model for all type of lease. The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest or incremental borrowing rate(i.e., 5.25% p.a. in this case)(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject depreciation on the straight-line basis over the lease term of 5 year.
	The leasee shall record the lease liability and right in use asset at the Present value of Lease payment as calculated below.
	Year	Payments (Cash flows)	Present Value Facr @5.25%p.a.	Discounted Cash flows/ Present value
	1	$                                                    50,000.00	1.00000	$                               50,000
	2	$                                                    50,000.00	0.95012	$                               47,506
	3	$                                                    50,000.00	0.90273	$                               45,136
	4	$                                                    50,000.00	0.85770	$                               42,885
	5	$                                                    50,000.00	0.81491	$                               40,746
	Total	$                                                        250,000		226,273
	(It is assumed that lease payment is being made at the beginning of the year and if it was at the end of the year then the lease liablity will be $214,986)
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease liability	Reduction of lease Liability	Lease liability
0.00	$                                           -	$                                                                    -	$                              -	$                             226,273
1	$                                  50,000	$                                                                    -	$                     50,000	$                             176,273
2	$                                  50,000	$                                                             9,254	$                     40,746	$                             135,527
3	$                                  50,000	$                                                             7,115	$                     42,885	$                               92,642
4	$                                  50,000	$                                                             4,864	$                     45,136	$                               47,506
5	$                                  50,000	$                                                             2,494	$                     47,506	$                                         -
	Note: As the lease payment is To record made at the beginning of the month, interest will be calculated on Opening lease liability less lease payment .
	Right in use asset Schedule: (Amortisation=$226,273/5 year= $45,255)
		In the books of Leasee
1		Journal Entries
	Year	Particulars	Debit	Credit
	Initial year	Right of Use Asset	$                  226,273
		Lease liabilty		$                             226,273
		(To record initially recognise the lease-related asset and liability .)
	Initial year	Lease liabilty	$                     50,000
		Cash		$                               50,000
		(To record lease payment)
	Initial year	Interest expense	$                       9,254
		Lease liabilty		$                                  9,254
		(To record interest expense)
		($226,273-50,000)*5.25%)
	Initial year	Depreciation expense	$                     45,255
		Right of Use Asset		$                               45,255
		( To record depreciation expense on the ROU asset)
		($226,273/5 year)
2	At the end of the Year 2
	Lease liability	$                                                        142,642
	ROU asset	$                                                        135,764
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