Question

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5−year lease on December​ 20, 2018. The lease commences on January​ 1, 2019, and Leewin will return the automobile to Bumble on December​ 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,300 on December​ 20, 2018. In​ addition, the lease agreement stipulates annual payments of $10,300​, due on January 1 of​ 2019, 2020,​ 2021, 2022, and 2023. The implicit rate of the lease is 4​% and is known by Leewin. There is no purchase​ option, no lease​ incentives, no residual value​ guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200.

Assuming that this is classified as an operating​ lease, what is the annual lease expense reported on the income​ statement?

Answer 1

	Lessee Accounting:
	The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest(i.e., 4% p.a. in this case) or incremental borrowing rate(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 Right in Use asset is recognised at :    Lease liability i.e.Present value of Lease payment less any incentive received and expected residual value(guaranteed) . Initial direct cost be added..
	The leasee shall record the lease liability at the Present value of Lease payment only in the given case.
	Year	Payments (Cash flows)	Present Value Factor @4%p.a.	Discounted Cash flows/ Present value
	1	$                                                    10,300.00	1.00000	$                               10,300
	2	$                                                    10,300.00	0.96154	$                                  9,904
	3	$                                                    10,300.00	0.92456	$                                  9,523
	4	$                                                    10,300.00	0.88900	$                                  9,157
	5	$                                                    10,300.00	0.85480	$                                  8,804
	Total	$                                                          51,500		47,688
	Right of use asset will be recognised at
		Initial Lease liability	$                     47,688
		Add: Initial Direct Cost	$                       1,200
		Add: Lease payment before lease commencement	$                     10,300
		ROU Asset	$                     59,188
	Right in use asset Amortisation=$189,401/5 year= $37,880)
	Lease Amortisation Schedule:
Year	Opening lease liability	Lease Payments	Interest Expense @ 4% per annum	Closing lease liability
	a	b	c=(a-b)*4%	d=a+c-b
1	$                                  47,688	$                                                          10,300	$                       1,496	$                               38,883
2	$                                  38,883	$                                                          10,300	$                       1,143	$                               29,727
3	$                                  29,727	$                                                          10,300	$                           777	$                               20,204
4	$                                  20,204	$                                                          10,300	$                           396	$                               10,300
5	$                                  10,300	$                                                          10,300	$                             (0)	$                                        (0)
	Note: As the lease payment is made at the beginning of the year, interest will be calculated on Opening lease liability less lease payment .
	Right in use asset Schedule: (Amortisation=$59,188/5 year= $11,838)
	Year	Opening	Depreciation	Closing
	1	$                                                          59,188	$                     11,838	$                               47,350
	2	$                                                          47,350	$                     11,838	$                               35,513
	3	$                                                          35,513	$                     11,838	$                               23,675
	4	$                                                          23,675	$                     11,838	$                               11,838
	5	$                                                          11,838	$                     11,838	$                                         -
	Annual expense reported in Income statement
	Year	Interest Expense @ 4% per annum	Depreciation	Annual expense
	1	$                                                             1,496	$                     11,838	$                               13,333
	2	$                                                             1,143	$                     11,838	$                               12,981
	3	$                                                                777	$                     11,838	$                               12,615
	4	$                                                                396	$                     11,838	$                               12,234
	5	$                                                                   (0)	$                     11,838	$                               11,838