Question

1. Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the following:

Lease term	Five years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter
Annual payments, beginning at lease commencement and annually thereafter	Commencement – $25,000 Year 2 – $26,000 Year 3 – $27,000 Year 4 -- $28,000 Year 5 -- $29,000
Discount rate	4.0%
Present value (PV) of lease payments	$124,645

Complete the following table to show the impact on each year of Lessee’s income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1.

	Initial	Year 1		Year 2	Year 3	Year 4	Year 5
Cash lease payments
Income statement:
Periodic lease expense (straight-line)
Prepaid (accrued) rent for period
Balance sheet at end of year:
Lease liability
ROU asset:
Lease liability
Adjust: Accrued rent (cumulative)
Unamortized direct initial costs
ROU asset

Answer 1

	Initial	Year 1	Year 2	Year 3	Year 4	Year 5
Cash Lease payments	30,000	26,000	27,000	28,000	29,000
Income Statement
Periodic Lease expense	25,014	22,015	23,895	25,851	27,885
Prepaid rent for the period	4,986	3,985	3,105	2,149	1,115
Balance sheet at the end of the year
Lease liability	1,29,631	1,03,616	80,721	55,870	28,984
ROU Asset:
Lease liability	1,29,631	1,03,616	80,721	55,870	28,984
Adjusted accrued rent	25,014	22,015	23,895	25,851	27,885
Unamortized direct initial cost	4,986	3,985	3,105	2,149	1,115
Total ROU asset	1,59,631	1,29,616	1,07,721	83,870	57,984