Question

On January 1, 2017, Bonduris Company leases warehouse space in Oakland, CA. The lease is for six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay $15,000 on January 1, 2017. The lease calls for subsequent rent payments to increase 10% per year. For example, the January 1, 2018 payment will be $16,500, and the January 1, 2019 payment will be $18,150. Bonduris has adopted early ASC 842 and has appropriately classified the lease as an operating lease. Bonduris has a calendar reporting year and an incremental borrowing rate of 7%. Bonduris uses straight-line amortization for its long-lived assets. Ignore current and non currrent classification for this exercise. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

1-What journal entries should Bonduris make at January 1, 2017, to record the effects of the lease?

2-Prepare Bonduris’s amortization table for the leased warehouse.

3-What is the balance of the lease liability on January 1, 2018, after Bonduris makes the rent payment?

4-What is the balance of the right-of-use asset on January 1, 2018, after Bonduris makes the rent payment?

Answer 1

Workings:

Years	Lease Rental	Present Value factor	Present Value of LR
1	15,000.00	1	15,000.00
2	16,500.00	0.93458	15,420.57
3	18,150.00	0.87344	15,852.94
4	19,965.00	0.8163	16,297.43
5	21,961.50	0.7629	16,754.43
6	24,157.65	0.71299	17,224.16
	Present Value of Lease Rental		96,549.53

1-What journal entries should Bonduris make on January 1, 2017, to record the effects of the lease?

Account Name	Debit	Credit
Right to Use Assets	96,549.53
To Lease Obligation		81,549.53
To Cash		15,000.00
(Being Assets and lease Liability Recognised)

2-Prepare Bonduris’s amortization table for the leased warehouse.

Years	Begning of 2017	2017	2018	2019	2020	2021	2022
Lease Expenses		19,289.09	19,289.09	19,289.09	19,289.09	19,289.09	19,289.09
Right to Use Assets	96,549.53	82,968.90	68,632.88	53,373.06	36,997.75	19,289.09	-
Right to Use Assets- Amortization		13,580.62	14,336.03	15,259.81	16,375.32	17,708.66	19,289.09
Lease Obligation	81,549.53	70,757.99	57,561.05	41,625.33	22,577.60	-	-
Lease Liability Accreation		5,708.47	4,953.06	4,029.27	2,913.77	1,580.43	-
Payments	15,000.00	16,500.00	18,150.00	19,965.00	21,961.50	24,158.03	-

3-What is the balance of the lease liability on January 1, 2018, after Bonduris makes the rent payment?

Lease liability on January 1, 2018, will be 70,757.99 as per above table

4-What is the balance of the right-of-use asset on January 1, 2018, after Bonduris makes the rent payment?

The balance of the right-of-use asset on January 1, 2018, will be 82,968.90 as per above table.

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