Lease Accounting

Question 1

Are executory costs part of the PV of lease payment calculation?

Answer 1

No, executory costs are not used to compute the PV of lease payments

Question 2

How is the cash payment for a finance lease recorded?

Answer 2

The cash payment is broken out between the interest component and the amortization (or principal) component. The amortization component decrease the lease liability (see the below example)

Interst expense $2,000
Lease liability $8,000
Cash $10,000

Amortization expense is recorded as a separate entry usually at SL

Question 3

How is the cash payment for an operating lease recorded?

Answer 3

The cash payment contains an iterest component and amortization component that is combined for the lease expense (see the below example)

Lease expense (interest + amortization) $10,000
Cash $10,000

Amortization expense is recorded as a separate entry for the amortization component of the lease expense.

Lease liability $10,000
Accumulated amortization $10,000

Question 4

What amounts of subsequent years’ lease payments must be disclosed in the financial statements?

Answer 4

Aggregate amount of lease payments for the next 5 years as well as the total amounts to be paid thereafter (2 parts 5 and total thereafter)