Topics: Lease, Depreciation, Generally Accepted Accounting Principles Pages: 2 (290 words) Published: April 10, 2013
Connie: determine how treatment would be diff under U.S. GAAP, include calculations, etc. + Pass off to Kathy/Chelsea to talk about Need space case.

* Under US GAAP ASC 840-30 it would be treated as a capital lease * Lease term is> 75% of economic life
* P.V. of MLP is > 90% of FMV of leased property
* Record the asset and obligation at PV of MLP (ASC 840-30-30-1) * Depreciation- ASC 840-30-35-1 (a) and (b) gives guidance on how to depreciate when ownership transfers or not

Under U.S. GAAP many things in the Senior Accountant’s computations would change. First you would allocate the payments based on the 10 percent implicit rate from the lessor not the 11 percent incremental borrowing rate from the lessee. This would change the total Lease Obligation to $263,716. ($100,000x2.4896 + $20,000 x 0.7513 = $263,716) Below are the new allocating payments between interest and lease obligation.

Year| Cash payment| Interest expense (10%)| Reduction in Lease Obligation| Balance of Lease Obligation| 0| | | | $263,716|
1| $100,000| $26,372| $75,131| $190,088|
2| $100,000| $19,009| $80,991| $109,097|
3| $100,000| $10,910| $89090| $20,007|

The balance is the residual value at the end of the lease ($20,007≈$20,000).

The journal entry to record the lease obligation would have to change based on the correct percentage.

Leased Equipment under Capital Lease $263,716
Lease payable $263,716

The correct journal entry to record Year 1 payment would be: Rent Expense $2,000
Interest Expense $26,372
Lease payable $73,628
Cash $102,000

The depreciation recorded would be the same as what we just talk about.
Continue Reading

Please join StudyMode to read the full document

Become a StudyMode Member

Sign Up - It's Free