LEASE MODIFICATIONS

MAY 28,2020
CASE PROBLEMS

1. On January 1, 2020 , Silver Company entered into a 5-year lease of a

floor of a building with these terms: annual rent for the first two years
payable at year end.-200,000; annual rent for the next 3 yrs. payable
at the end of each year-300,000; initial direct cost paid by the lessee-
100,000; leasehold improvement-250,000; present value of restoration
cost required by contract- 50,000; useful life of building- 20 yrs.;
implicit interest rate-8%; PV of an ordinary annuity of 1 at 8% for 2
yrs.-1.783; PV of an ordinary annuity of 1 at 8% for 3 yrs.-2.577 and
PV of 1 at 8% for 2 years-0.857.

Required:

1. Compute the following: lease liability on 1/1/20; right of use asset;

depreciation for 2020.

2. Prepare the following: table of amortization; journal entries for

2020 and on 12/31/22.

2. On Jan. 1, 2020, Southstar Company entered into an 8-year lease of a floor

building with useful life of 15 years with the ff. terms: annual rent for first 3
years due at end of each year-300,000; annual rent for the next 5 years due at
the end of each year-400,000; implicit interest rate-10%; PV of an ordinary
annuity of 1 at 10% for 3 periods-2.49;PV of an ordinary annuity of 1 at 10% for
5 periods-3.79; PV of 1 at 10% for 3 periods-0.75. The lease provides for neither
a transfer of title to the lessee nor a purchase option.

Required:
1. What is the lease liability on January 1, 2020?
a. 1,516,000 c. 1,884,000
b. 2,263,000 d. 1,697.250
Solution: C. 1,884,000
Present value for first 3 years(300,000 x 2.49) 747,000

Present value for next 5 years(400,000 x 3.79) 1,516,000

Multiply by PV of 1 at 10% for 3 periods 0.75
Present Value-January 1, 2020 1,137,000
Present value for first 3 years 747,000
Lease liability 1,884,000
2. What is the interest expense for 2020?
a. 188,400 c. 151,600
b. 226,300 d. 169,725
Solution: A. 188,400
Interest expense for 2020 1,884,000 x 10% 188,400

3. What is the interest expense for 2023

a. 151,460 c. 164,964
b. 126,606 d. 200,000
Solution: A. 151, 460( see table)
4. What is the lease liability on December 31, 2023
a. 1,614,604 c. 1,366,064
b. 1,266,064 d. 1,214,604
Solution: B. 1,266,064
Date Payment (10%) Principal Present Value
interest
1/1/2020 1,884,000
12/31/2020 300,000 188,400 111,600 1,772,400
12/31/2021 300,000 177,240 122,760 1,649,640
12/31/2022 300,000 164,964 135,036 1,514,604
12/31/2023 400,000 151,460 248,540 1,266,064

ANSWERS:
Requirement 1:
**Lease liability on January 1, 2020
Annual rental for first 2 years P200,000
Multiply by PV of an ordinary annuity of 1 at 8% for 2 periods 1.783
Present Value – January 1, 2023 356,600

Annual rental for next 3 years 300,000

Multiply by PV of an ordinary annuity of 1 at 8% for 3 periods 2.577
Present Value-January 1, 2022 773,100

Multiply by PV of an ordinary annuity of 1 at 8% for 2 periods 0.857

Present Value-January 1, 2020 662,547

The present value of annual rental for 2 years 356,600

Present Value of annual rentals for next 3 years 662,547
Total present value-January 1, 2020 1,019,147

**Right of use asset

Initial lease liability 1,019,147
Initial direct cost 100,000
Estimated restoration cost 50,000
Total cost of right of use of asset 1,169,147
 **Depreciation for 2020
Depreciation (1,169,147/5) 233,829

Requirement 2:
**table of amortization
Date Payment (8%) interest Principal Present Value
1/1/2020 1,019,147
12/31/2020 200,000 81,532 118,468 900,679
12/31/2021 200,000 72,054 127,946 772,733
12/31/2022 300,000 61,819 238,181 534,552
12/31/2023 300,000 42,779 257,221 277,331
12/31/2024 300,000 22,669 227,331 -
** journal entries for 2020
Right of use of asset 1.069,147
Lease Liability 1,019,147
Cash 100,000
Estimated liability-restoration cost 50,000

Depreciation 233,829
Accumulated depreciation 233,829

Interest Expense 81,352

Lease liability 118,468
Cash 200,000
**Journal entries for 12/31/22.
Interest Expense 61,819
Lease liability 238,181
Cash 300,000