Question

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Taylor address this lease modification

Answer 1

update the right-of-use asset for the increase in present value

reclassify from an operating lease to a finance lease

Step-by-step explanation:

In the given instance there is a modification to the lease contract after 2 years of the 3 year lease.

Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments.

Financial lease is one that confers a form of ownership of the lessee. He does not only have operational control of the equipment but also bears gains or loss from change in the value of the asset.

The new lease agreement covers most of the useful life of the equipment so it confers some degree of ownership to Taylor company. There is a need to reclassify the lease as a financial lease.

The present value of the asset has also increased has also increased so the right of use should be upgraded