Question

On January 1, Falk Company signed a contract to lease space in a building for three years. The current value of the three lease payments is $270,000.

Required: Prepare entries for Falk to record (a) the lease asset and obligation at January 1, and (b) the $90,000 straight-line amortization at December 31 of the first year.

Answer 1

part a

Right of use asset $270,000 (debit)

Lease Obligation $270,000 (credit)

part b

Lease obligation $90,000 (debit)

Cash $90,000 (credit)

Step-by-step explanation:

During initial recognition, the Lease Obligation is measured at the present value of lease payments whilst the Right of use asset is measured at the amount at which the Lease Obligation was initially recognized plus any other costs directly incurred in placing the assets in the location and condition intended for use by managers in terms of (IAS 16).

In the subsequent years, the Lease obligation will be amortized, this means the amount of liability increase by the amount cash flow set on the lease that comprises of interest and capital repayment.