Scenario 5: Asset Casualty

In this example, a 9-year lease contract is created for one asset. The monthly rent payments are CU 774.01 payable at the end of every day (i.e., arrears payments) on the 18th of the month. The Lessee’s nominal discount rate at the commencement date is 4.17% per annum.

To set up the contract, the following inputs must be entered during contract inception. For detailed information on the contract inception process, refer to About Contract Inception.

  1. Create the contract and enter the following inputs on the contract Accounting page:
    • Contract Rate: 4.1700
    • Compounding Frequency: Monthly
    • 360 Convention: Selected
    • Payments in Arrears: Unselected
  2. Set up the lease component and create the following terms on the Terms & Conditions page:
    1. Add the Base Rent term:
      • Lease Amount: 774.01
      • Amount Frequency: One Time
      • Payment Frequency: Monthly
      • First Payment Date: 2019-02-18
      • Last Payment Date: 2028-03-18
      • Term (months): 109
      • Term (days): 18
      • Expected T&C Start Date: 2019-02-01
      • Expected T&C End Date: 2028-03-18
  3. Complete the contract inception process and activate the activation group with the Activation Date set to "2019-02-01".
  4. Once the activation group is activated, the following entries must be posted:

    Dr. Right-of-Use Asset

    70,763.56

     

    Cr. Lease Liability  70,763.56

At the beginning of the 13th month in the lease term (i.e. February, 2020), the asset is completely damaged, and consequently written off, with no associated penalties.

To reflect this in the application, perform a casualty event and enter the following parameters:

  1. Set the following fields in the casualty pop-up:
    • Payment Date: 2020-02-18
    • Modify Contract Rate: Unselected
    • Casualty Amount: 223.07
  2. Complete the casualty event with the Effective Date set to "2020-02-18".
  3. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    63,192.93

     

    Cr. Gain/Loss

     

    63,192.93

        
    Dr. Acc. Depr. ROU Asset 8,113.74 
    Dr. Gain/Loss 62,649.82 
    Cr. Right-of-Use Asset  70,763.56

Finally, post any unposted payment, accrual, or asset depreciation amounts and follow the lease end process to close the lease.

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