Question

Terms of warehouse contract with Premier Storage:

-The warehouse lease began on January 1, 2018, with a three-year term. The warehouse has an expected remaining useful life of 20 years. There is no provision in the contract for Chariot to obtain ownership of the warehouse.

-During the lease, Chariot has exclusive control over the entire warehouse building and surrounding property.

-Chariot agreed to lease payments of: $500,000 in 2018, $600,000 in 2019 and $700,000 in 2020. Payments are due on December 31 of each year with the first payment being made on December 31, 2018. Chariot is aware that Premier used a 5% interest rate when calculating the lease payments. Note: while the terms of the lease require uneven payment amounts, Chariot should amortize the right-of-use asset on a straight-line basis (as if all three payments were $600,000); this does not affect the amortization of the lease liability.

-The fair value of the warehouse is approximately $20 million.

For the warehouse lease, provide answers to the following questions:

1. Prepare an amortization schedule for the right-of-use asset and the lease liability.

2. Identify the journal entries Chariot would prepare to record the lease under the new lease accounting standard on:

January 1, 2018

December 31, 2018

December 31, 2019

December 31, 2020

3. Show how the warehouse lease contract would appear on the December 31, 2018 year-end Income Statement, Balance Sheet, and Statement of Cash Flows under the new lease accounting standard.

Answer 1

1)

-This is an Operational Lease as it covers only 3/20Years of life of asset.

-Contract doesnt contain to aquire ownership at lower cost than fair value at the end of lease period.

->Calculating Present Value of Minimum lease payment(To recognise as an asset)

Year	Cashflow	Discount factor	Present Value
1	50,000	=0.952..	47,600
2	60,000	=0.907	54,420
3	70,000	=0.863	60,410
		Minimum vale of Lease payment	162,430

Where R, is the Implicit Interest Rate And N-No:of year

(Or Simply use formula for PV 60,000 @5% for 3years- if constant payment of 60,000 it was by annuity formula)

Right-of-use asset=162,430

2)Jan 1- 2018

	Debit	Credit
Right of use of asset	162,430(above)
Liability		162,430

For Preparing journal it is easy to prepare an amortization table.

Amortisation table (Is not necessery as Closing Balance wont be the Right of Use at Year End)

table 2-Accrued payment

Year	Opening	Interest 5%	Repayment	Closing(opening+int-Payment)
1-2018	162,430(Above)	162,430*0.05=8,122	(50,000)	(163,320+8,122-50,000)=120,552
2-2019	120,552	120,552*0.05=6,027	(60,000)	66,579
3	66,579	3,329	(70,000)	0
4
5

Dec 30- 2018

"Chariot should amortize the right-of-use asset on a straight-line basis (as if all three payments were $600,000)"  

Lease Expense = (50+60+70)/3 =60,000

	Debit	Credit
Lease Expense	60,000
Interest on lease liability(Amortisation table) Coloumn 3		8,122
Right Of Use (Balance) (60,000-8,122)		51,787

Right To Use of Asset At Balance sheet = (Opening-51,787) = 162,430-51,787 =110,643 (31Dec 2018)

Making Payment

Lease Liability	50,000
Cash		50,000

December 31, 2019

	Debit	Credit
Lease Expense	60,000
Interest (Amortisation table) Coloumn 3		6,027
Right Of Use of Asset (Balance)		53,973

Right To Use of Asset At Balance sheet = (Opening-51,787) = 110,643-53,973 =56,670 (31Dec 2019)

Making Payment

Lease Liability	60,000
Cash		60,000

December 31, 2020

	Debit	Credit
Lease expense	60,000
INT (table Coloumn 3)		3,329
Right of Use		56,671

Right To Use of Asset At Balance sheet = (Opening-51,787) = 56,670-56,671 =0 (31Dec 2020)

making Payment

	Debit	Credit
Lease	70,000
Cash		70,000