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.
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

Requirement 1						Amount in $
	Date	General Journal				Debit	Credit
	January 1, 2017	Right of use asset				96549.25
			Leased Liabilitiy				96549.25
		To record the inception of lease
Requirement 2						Lease Amortization schedule
	Year	Annual Lease payments	PVIF@7%	Present Value		Year	Annual Lease payments	Interest expense	Reduction in principal	Principal Outstanding
	0	15000	1	15000						96549.2546
	1	16500	0.934579	15420.56075		0	15000	0	15000	81549.2546
	2	18150	0.873439	15852.91292		1	16500	5708.448	10791.55	70757.7024
	3	19965	0.816298	16297.38711		2	18150	4953.039	13196.96	57560.7415
	4	21961.5	0.762895	16754.3232		3	19965	4029.252	15935.75	41624.9934
	5	24157.65	0.712986	17224.07058		4	21961.5	2913.75	19047.75	22577.243
	Present Value of Lease payments			96549.25456		5	24157.65	1580.407	22577.24	0
						6
Requirement 3		The Balance in Leased liability on January 1, 2018					70757.7
		The above balance can be explained with the help of following journal entries
						Amount in $
	Date	General Journal				Debit	Credit
	January 1, 2017	Right to use asset				15000
			Cash				15000
		To record the initial payment made towards lease
	January 1, 2018	Leased Liability				16500
			Cash				16500
	January 1, 2018	Lease expense				16500
			Leased Liability				5708.448
			Right of use asset				10791.55
Requirement 4
	The Balance in right to use an asset as on January 1, 2018 is					70757.7
	Note : Though the queston mentions abour straight-line amortization for its long lived assets,
	the ASC-842 requires systematic amortization of right to use asset which is not uniform amount
	every year.