Question

I was at a conference today and they were talking about some new lease regulations and how that may impact our financial statements. I know that we have a couple of leases, one that we record as a liability and one that we do not. How will this new lease requirement impact us? When does this go into effect? Will we need to restate prior financial statements? Are there any retrospective entries that we have to make? If so, what are they and when do we need to record them? They also talked about adopting early. I may be interested in early adoption. What would we need to do to implement this change this year?

Upon investigation of Blackwell's records, you found that Blackwell had had two leases. One that is currently being accounted for as a capital lease and one being treated as an operating lease (under current standards).

The capital lease was for equipment. The lease started in 2016 and was a 5-year lease of annual lease payments of $50,000, starting on January 1, 2016. The lease also had a bargain purchase option for $20,000 at the end of the lease. The equipment had a useful life of 6 years and Blackwell uses the straight-line method of depreciation. The implicit interest rate for this lease was 6%.

The operating lease was a 15-year lease for their facilities that started on January 1, 2015. The lease consisted of annual rental payments, starting on January 1, 2015, of $60,000. When they started the lease in 2015, the expected useful life of the facility was 30 years. Blackwell imputed interest rate is 8%.

1. Assuming that Blackwell will do early adoption and adopt ASU 2016-2 in 2018, what liabilities and assets will need to be reported in the 2017 and 2018 comparative financial statements.

Answer 1

Operating lease
	31st Mar 2017	31st Mar 2018
Right to Use Assets	488,338	462,605
Lease Obligation-Operating Lease	428,338	402,605
Lease Assets-Capital Lease	158,800	119,100
Lease Obligation-Finance Lease	108,462	64,970

Workings:

	Lease Payment	Discounting Factor	Present Value
0	60000	1.00000	60,000
1	60000	0.92593	55,556
2	60000	0.85734	51,440
3	60000	0.79383	47,630
4	60000	0.73503	44,102
5	60000	0.68058	40,835
6	60000	0.63017	37,810
7	60000	0.58349	35,009
8	60000	0.54027	32,416
9	60000	0.50025	30,015
10	60000	0.46319	27,792
11	60000	0.42888	25,733
12	60000	0.39711	23,827
13	60000	0.36770	22,062
14	60000	0.34046	20,428
			554,654

		2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029
	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Assets	554,654	534,227	512,165	488,338	462,605	434,813	404,798	372,382	337,373	299,563	258,728	214,626	166,996	115,556	60,000	(0)
Assets Amortization		20,428	22,062	23,827	25,733	27,792	30,015	32,416	35,009	37,810	40,835	44,102	47,630	51,440	55,556	60,000
Lease Obligation	494,654	474,227	452,165	428,338	402,605	374,813	344,798	312,382	277,373	239,563	198,728	154,626	106,996	55,556	(0)	-
Lease Expenses		60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000
Accreation		39,572	37,938	36,173	34,267	32,208	29,985	27,584	24,991	22,190	19,165	15,898	12,370	8,560	4,444	(0)

Finance Lease -Workings

Years	Lease Payments	DF	Present Value
2016-Beg	50000	1	50,000
2016	50000	0.9433962	47,170
2017	50000	0.8899964	44,500
2018	50000	0.8396193	41,981
2019	50000	0.7920937	39,605
2020	20000	0.7472582	14,945
			238,200

	Interests	Payments	Lease Obligation
0		50000	188,200
1	11,292.03	50000	149,492
2	8,969.55	50000	108,462
3	6,507.72	50000	64,970
4	3,898.18	50000	18,868
5	1,132.08	0	20,000

Assets Cost	238,200
Depreciation -2016	39,700
Depreciation -2017	39,700
WDV-2017	158,800
Depreciation -2016	39700
WDV-2018	119,100