Question

Tyson, Inc. leases a floor in an office complex from Ring, LLC. The lease is for 10 years at an annual payment of $175,000 for years 1 -5 and $240,000 for years 6-10. The Tyson’s borrowing rate for transaction of similar length is 8.75%. The building has a 25 year economic life. The lease has no option to review and no guarantee of any residual value. The present value of the lease payments does not equal the fair value of leased asset.

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

Journal entries for Initial year
		Debit	Credit
Initial recognition	ROU asset account Dr	$13,02,771.50
	To lease liability		$13,02,771.50
Lease payment	Lease liability account Dr	$61,007.49
	Interest account Dr	$1,13,992.51
	To Bank		$1,75,000.00
Depreciation	Depreciation account Dr	$1,30,277.15
	To ROU asset		$1,30,277.15
Interest & depreciation transferred to the Income statement	Statement of profit &loss Dr	$2,44,269.66
To Interest expense		$1,13,992.51
To Depreciation on ROU		$1,30,277.15

Lease liability at the end of year 2 = $1,175,418.36
Workings
Year	Lease Payment	Principal (Lease payment-interest)	Interest (lease liability outstanding*8.75%)	Outstanding Lease Liability
0	$0.00	$0.00	$0.00	$13,02,771.50
1	$1,75,000.00	$61,007.49	$1,13,992.51	$12,41,764.01
2	$1,75,000.00	$66,345.65	$1,08,654.35	$11,75,418.36

ROU asset at the beginning	$13,02,771.50
Lease term	10 years
Depreciation for 2 years =(1,302,771.50/10)*2	$2,60,554.30
ROU balance at the end of year 2= $1,302,771.50-$260,554.30	$10,42,217.20

Workings(initail recognition)

Year	Lease payment	PV factor @8.75%	PV of lease payment
1	$1,75,000.00	0.9195	$1,60,912.50
2	$1,75,000.00	0.8456	$1,47,980.00
3	$1,75,000.00	0.7775	$1,36,062.50
4	$1,75,000.00	0.7149	$1,25,107.50
5	$1,75,000.00	0.6574	$1,15,045.00
6	$2,40,000.00	0.6045	$1,45,080.00
7	$2,40,000.00	0.5558	$1,33,392.00
8	$2,40,000.00	0.5112	$1,22,688.00
9	$2,40,000.00	0.4700	$1,12,800.00
10	$2,40,000.00	0.4321	$1,03,704.00
TOTAL	$20,75,000.00		$13,02,771.50