Question

Bart Co. leases a common piece of equipment to Lisa Corp. The lease begins on January 1, 2020, and includes the following terms:

• The lease is for 6 years and is non-cancelable.
• The equipment reverts to Bart Co. at the end of the lease, with no renewal or purchase options.
• Lisa Corp. guarantees a residual value of $25,000. This is also the expected residual value.
• Bart Co. uses an implicit interest rate of 4% to set the lease payments of $16,369, which are due at the beginning of each year, starting with January 1, 2020. The collectability of these payments is probable.
• The implicit interest rate is known to Lisa Corp. Lisa’s incremental borrowing rate is 5%.
• The fair value of the equipment is $109,000 at the inception of the lease. Its estimated remaining economic life is 20 years. The cost of the equipment on Bart Co.’s books is $100,000.  
• Both parties use straight-line depreciation when accounting for similar pieces of equipment.

What is the value of the Right of Use Asset that Lisa Corp. (the lessee) should report on its balance sheet for December 31, 2020?

Answer 1

ANSWER

The implicit interest rate is known to Lisa Corp. Rate is for discounting is lower of incremental borrowing rate and implicit interest rate if known to the lessor. Therefore, 4% rate is used for lessee.
Lease amortization table - lessee
Date	Beginning balance of lease payable	Lease payment and Residual value	Interest expense (beginning balance of lease payable *4% )	Reduction in lease payable (lease payment - interest expense)	Beginning balance of lease payable (beginning balance of lease payable - reduction in lease payable)
Jan 1, 2020	$109,000	$16,369		$ 16,369	$ 92,631
Jan 1, 2021	$ 92,631	$16,369	$3,705	$ 12,664	$ 79,967
Jan 1, 2022	$79,967	$16,369	$ 3,199	$13,170	$ 66,797

What is the value of the Right of Use Asset that Lisa Corp. (the lessee) should report on its balance sheet for December 31, 2020?
Right of Use Asset on Jan 1, 2020	$           109,000
Less: Amortization (109000/6)	$             18,167
Right of Use Asset on December 31, 2020	$             90,833

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