In your audit of Entity A, you noted that the Rent expense account has an ending balance of $1,100,000 at December 31, 2021. $100,000 of this pertains to the maintenance costs paid by the Lessor on behalf of Entity A, which was later paid by Entity A. The lease commenced on January 1, 2021. The following are the terms of agreement:
Terms of the Lease Agreement
Lease term 8
Useful life 10
Annual rental payments due at the
end of the year 1,000,000
Residual value at the end of useful life 500,000
Bargain purchase option 200,000
Maintenance costs 100,000
Implicit rate 8%
Note: There is reasonable certainty that the purchase option will be exercised by Entity A at the end of the lease term Required:
Based on your computations, you found out the the amounts should be:
(a) Initial lease liability & Right-of-use asset = $5,854,660 (This is based on the PV of lease payments + PV of purchase option).
(b) Depreciation expense = $535,466 (This is computed as $5,854,600 - 500,000 (Residual value) = $5,354,660/10 years = $535,466)
(c) Lease liability at the end of the year= $5,323,033
(d) Carrying amount at the end of the year = $5,319,194
REQUIRED:
1. How will the computations in #1 change assuming that instead of the purchase option, there is a Residual Value Guarantee of $200,000 at the end of the lease term?
2. Assume that Entity A classified the right-of-use asset as Investment Property measured at fair value, what will be the initial and subsequent measurement of the asset?