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ASC 842 Operating Leases

Lessees would recognize periodic lease expense for ASC 842 operating leases on a straight-line basis, similar to today’s accounting for operating leases. The lease payments will be recognized in the income statement on a straight-line basis over the lease term and reflected in the income statement as a single lease cost (i.e., rent expense).

Monthly Rent Expenses

The lessee would recognize the periodic lease expenses on a straight-line basis. The periodic lease expenses will also include periodic interest expenses.

Amortization of Lease Asset and Liability

The leased asset or liability will be reduced by an amount equal to the actual payment for the period subtracted by the interest expense for the period.

Example

The carrying value of the lease at the beginning of the period is $381,143.08, the actual payment is $17,810.43 for the period, and the periodic rent expense is $15,635.57. The carrying value at the end of the period is $364,047.30 (calculated by using the Net Present Value of the remaining periods). The required calculations must be performed.

The interest expense (which will be recognized along with the periodic lease expense on a straight-line basis) could be calculated by multiplying the carrying value of the lease at the beginning of the period by the effective interest rate determined for the particular lease. If the effective interest rate is 2.25% compounded monthly, the interest expense on the opening carrying value of $381,143.08 is calculated as follows: $381,143.08 x (0.0225/12) = $714.64

This interest is included in the periodic lease expense and will be recognized as a periodic lease expense on a straight-line basis. The remaining amount is calculated as follows:

Adjustment to ROU asset = straight-line expense minus interest expense = $15,635.57 - $714.64 = $14,920.90

The system will generate the following journal entries:

To record rent payment:
Dr. Rent Expense		$714.64
Dr. Lease Liability		$17,095.79
	Cr. Cash		$17,810.43
To record the reduction in the lease asset and liability:
Dr. Rent Expense		$14,920.93
	Cr. Right-of-Use Asset (Acumm Amort)		$14,920.93