Scenario 1: Lease Modification to Perform an Early Termination

In this scenario, a 24-month contract is created for one asset. The monthly rent payments are CU 1,000 payable at the end of every day (i.e., arrears payments) on the 15th of the month. The Lessee’s nominal discount rate at the commencement date is 2% 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: 2.00
    • Compounding Frequency: Monthly
    • 360 Convention: Selected
    • Payments in Arrears: Selected
  2. Set up the lease component and enter the following inputs on the Terms & Conditions page to create the Base Rent term:
    • Lease Amount: 1,000
    • Amount Frequency: One Time
    • Payment Frequency: Monthly
    • First Payment Date: 2018-01-15
    • Last Payment Date: 2019-12-31
    • Term (months): 24
    • Expected T&C Start Date: 2018-01-01
    • Expected T&C End Date: 2019-12-31
  3. Complete the contract inception process and activate the activation group with the Activation Date set to "2018-01-01".
  4. Once the activation group is activated, the following entries must be posted:

    Dr. Right-of-Use Asset

    23,507.55

     

    Cr. Lease Liability  23,507.55

At the beginning of the third month in the lease term (i.e. March, 2018), the Lessee and Lessor agree to terminate the lease before the originally planned End Date, with no penalties associated to the termination.

To reflect this in the application, perform a lease modification on the contract with the following inputs:

  1. Set the following fields in the lease modification pop-up:
    • Amendment Date: Set this date to the date of the amendment (i.e. today's date).
    • Reason Code: Set this field to any Reason Code other than Decrease Lease Term or Decrease Asset Value.
    • Modify Contract Rate: Unselected
  2. On the lease component Terms & Conditions page, add a Termination Option term with the following inputs:
    • Lease Amount: 0.00
    • Amount Frequency: One Time
    • Payment Frequency: One Time
    • First Payment Date: 2018-03-15
    • Last Payment Date: 2018-03-15
    • Expected T&C Start Date: 2018-03-15
    • Expected T&C End Date: 2018-03-15
  3. Complete the lease modification with the Effective Date set to "2018-02-16".
  4. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    21,067.17

     

    Cr. Right-of-Use Asset

     

    21,067.17

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

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