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    Finance and Operating Lease Exercise (Solution)

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    Finance and Operating Lease Exercise (Solution)

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    62 views10 pages

    Finance and Operating Lease Exercise (Solution)

    Uploaded by

    Emnet Ab

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
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    Finance and Operating Lease Exercise (Solution)

    Table of Contents
    Finance Lease
    Operating Lease

    Notes
    This Excel model is for educational purposes only and should not be used for any other reason.
    All content is Copyright material of CFI Education Inc.
    https://corporatefinanceinstitute.com/

    © 2020 CFI Education Inc.


    All rights reserved.  The contents of this publication, including but not limited to all written material, content layo
    No part of this publication may be modified, manipulated, reproduced, distributed, or transmitted in any form by
    without prior written permission of the publisher, except in the case of certain noncommercial uses permitted by
    (Solution) Strictly Confidential

    any other reason.

    o all written material, content layout, images, formulas, and code, are protected under international copyright and trademark laws. 
    ed, or transmitted in any form by any means, including photocopying, recording, or other electronic or mechanical methods,
    noncommercial uses permitted by copyright law.
    © Corporate Finance Institute. All rights reserved.

    Finance Lease Exercise (Solution)

    Instructions:
    Company ABC enters into a 5-year lease beginning on January 1, 2021.
    Annual payments are $20,000, made at the end of each year for a total of $100,000 over the lease term.
    The rate implicit in the lease is 6%. There are no initial direct costs.

    1. Calculate the initial lease liability and right-of-use asset balances.


    2. Show the journal entries to record the lease for each of the years assuming that this is a finance lease

    Initial Lease Liability and Right-of-Use Asset Balances

    IBR / Interest Rate Implicit in the Lease 6% 2021 2022


    Annual Lease Payments $20,000 $20,000

    Initial Lease Liability Balance


    Initial Right-of-Use Asset Balance

    Lease Liability and Right-of-Use Asset Continuity Schedules

    Lease Term 5 Years 2021 2022


    Right-of-Use Asset
    Beginning Balance $84,247 $67,398
    Amortization -$16,849 -$16,849
    Ending Balance $67,398 $50,548

    Lease Liability
    Beginning Balance $84,247 $69,302
    Interest $5,055 $4,158
    Lease Payments -$20,000 -$20,000
    Ending Balance $69,302 $53,460

    Journal Entries to Record the Finance Lease

    January 1, 2021 (Initial Recognition)


    Right-of-Use Asset
    Lease Liability

    Subsequent Recognition
    December 31, 2021
    Amortization Expense
    Interest Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2022


    Amortization Expense
    Interest Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2023


    Amortization Expense
    Interest Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2024


    Amortization Expense
    Interest Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2025


    Amortization Expense
    Interest Expense
    Lease Liability
    Accumulated Amortization
    Cash
    lease term.

    nance lease.

    2023 2024 2025


    $20,000 $20,000 $20,000

    $84,247
    $84,247

    2023 2024 2025

    $50,548 $33,699 $16,849


    -$16,849 -$16,849 -$16,849
    $33,699 $16,849 $0

    $53,460 $36,668 $18,868


    $3,208 $2,200 $1,132
    -$20,000 -$20,000 -$20,000
    $36,668 $18,868 $0

    Debit Credit

    $84,247
    $84,247
    $16,849
    $5,055
    $14,945
    $16,849
    $20,000

    $16,849
    $4,158
    $15,842
    $16,849
    $20,000

    $16,849
    $3,208
    $16,792
    $16,849
    $20,000

    $16,849
    $2,200
    $17,800
    $16,849
    $20,000

    $16,849
    $1,132
    $18,868
    $16,849
    $20,000
    © Corporate Finance Institute. All rights reserved.

    Operating Lease Exercise (Solution)

    Instructions:
    Company ABC enters into a 5-year lease beginning on January 1, 2021.
    Annual payments are $20,000, made at the end of each year for a total of $100,000 over the lease term.
    The rate implicit in the lease is 6%. There are no initial direct costs.

    1. Calculate the initial lease liability and right-of-use asset balances.


    2. Show the journal entries to record the lease for each of the years assuming that this is an operating lease

    Initial Lease Liability and Right-of-Use Asset Balances

    IBR / Interest Rate Implicit in the Lease 6% 2021 2022


    Annual Lease Payments $20,000 $20,000

    Initial Lease Liability Balance


    Initial Right-of-Use Asset Balance

    Lease Liability and Right-of-Use Asset Continuity Schedules

    Lease Term 5 Years 2021 2022


    Right-of-Use Asset
    Beginning Balance $84,247 $69,302
    Amortization -$14,945 -$15,842
    Ending Balance $69,302 $53,460

    Lease Liability
    Beginning Balance $84,247 $69,302
    Interest $5,055 $4,158
    Lease Payments -$20,000 -$20,000
    Ending Balance $69,302 $53,460

    Journal Entries to Record the Operating Lease

    January 1, 2021 (Initial Recognition)


    Right-of-Use Asset
    Lease Liability

    Subsequent Recognition
    December 31, 2021
    Lease Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2022


    Lease Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2023


    Lease Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2024


    Lease Expense
    Lease Liability
    Accumulated Amortization
    Cash

    December 31, 2025


    Lease Expense
    Lease Liability
    Accumulated Amortization
    Cash
    lease term.

    operating lease.

    2023 2024 2025


    $20,000 $20,000 $20,000

    $84,247
    $84,247

    2023 2024 2025

    $53,460 $36,668 $18,868


    -$16,792 -$17,800 -$18,868
    $36,668 $18,868 $0

    $53,460 $36,668 $18,868


    $3,208 $2,200 $1,132
    -$20,000 -$20,000 -$20,000
    $36,668 $18,868 $0

    Debit Credit

    $84,247
    $84,247
    $20,000
    $14,945
    $14,945
    $20,000

    $20,000
    $15,842
    $15,842
    $20,000

    $20,000
    $16,792
    $16,792
    $20,000

    $20,000
    $17,800
    $17,800
    $20,000

    $20,000
    $18,868
    $18,868
    $20,000

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