On January 1, 2017, Bonduris Company leases warehouse space in Oakland, CA. The
ID: 2527572 • Letter: O
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?
Explanation / Answer
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.