Memorandum<\/p>\n
To: \tDon Collizi
\nPresident, Boarshead Corporation
\nFrom: Janet Wilt, CPA
\nDate: 05 May 2018
\nSubject: new lease requirements and Transition
\nIntroduction
\nAccording to the new standard a lease is defined as either
\n1.\tcontract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.\u201d For a contract to be, or contain, a lease, it must (1) depend on the use of an identified asset (which can be implicitly or explicitly identifiable and takes into account the substantive substitution rights of a lessor)
\n2.\tconvey the right to control the use of the asset over the lease term (this depends on a customer\u2019s right to obtain substantially all the economic benefits from use of the identified asset while having the right to direct its use).
\nThe standard Transition
\nThe modified transition method for accounting for leases should be used by both the Lessees and lessors. The transition takes effect in the new accounting model for the earliest year in the accounting period of the financial statements. In the current model ASC 840 for lease classification and ASC 842 for the new model of classification of leases the two are related. In addition, the new model reduces the burden of the initial classification.
\nAs of February 25, 2016, the Financial Accounting Standards Board (FASB) has developed a new issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new standard update requires that the firm recognize and report the lease asset and liabilities in the balance sheet but with some exceptions. The non-public companies have a year to adopt to the new standard whole the public entities are supposed to adopt the new standard as of the fiscal year that begins after December 15, 2018. It also applies to the interim reporting that are within those periods. The reporting of the financial statements that starts on January 1, 2019 the public firms that have year ending of December 31 will have to adopt the new policies. The non-public companies and firms have a grace of one year after that although they have may adopt it earlier than required. Using the modified retrospective approach firm will have to recognize the same at beginning of the earliest period for both the lessorsand lessees. Exception altogether apply for the firms that had leases that existed prior to the standard but have the option of modifying the agreement on the lease or at the same time can opt to terminate the leases so as to accommodate the new regulations on the reporting of the leases. The options also include the purchase of the new assets. If an entity applies to use the practical expedients will, account for leases using the previous GAAP unless it is modified but the agreements must have commenced before the effective date but must note that the leases must recognize a right-to use (ROU) asset and a lease liability and are based on the present value of the remaining lease payment of the operating lease reporting dates. The same can be tracked under the previous GAAP and had earlier been disclosed.
\nBoarshead early adoption of ASU 2016-2 in 2018
\nIf the firm adopts the early treatment of the standards, the reporting of the lease agreements will be reported as follows
\nCapital Lease Accounting \u2013 Equipment
\nyear\t Payment \t Interest \t Principal \t balance
\nJanuary 1 2016\t\t\t\t $ 250,000
\nJanuary 1 2016\t $ 50,000 \t\t $ 50,000 \t $ 200,000
\nJanuary 1 2017\t $ 50,000 \t $ 12,000 \t $ 38,000 \t $ 162,000
\nJanuary 1 2018\t $ 50,000 \t $ 9,720 \t $ 40,280 \t $ 121,720
\nJanuary 1 2019\t $ 50,000 \t $ 7,303 \t $ 42,697 \t $ 79,023
\nJanuary 1 2020\t $ 50,000 \t $ 4,741 \t $ 45,259 \t $ 33,765
\nJanuary 1 2021\t $ 20,000 \t $ 2,026 \t $ 17,974 \t $ 15,790<\/p>\n
Capital Lease Accounting \u2013 Facility
\nyear\t Payment \t Interest \t Principal \t balance
\nJanuary 1 2015\t\t\t\t $ 900,000
\nJanuary 1 2015\t $ 60,000 \t\t\t $ 900,000
\nJanuary 1 2016\t $ 60,000 \t $ 72,000 \t $ (12,000)\t $ 840,000
\nJanuary 1 2017\t $ 60,000 \t $ 67,200 \t $ (7,200)\t $ 780,000
\nJanuary 1 2018\t $ 60,000 \t $ 62,400 \t $ (2,400)\t $ 720,000
\nJanuary 1 2019\t $ 60,000 \t $ 57,600 \t $ 2,400 \t $ 660,000
\nJanuary 1 2020\t $ 60,000 \t $ 52,800 \t $ 7,200 \t $ 600,000
\nJanuary 1 2021\t $ 60,000 \t $ 48,000 \t $ 12,000 \t $ 540,000
\nJanuary 1 2022\t $ 60,000 \t $ 43,200 \t $ 16,800 \t $ 480,000
\nJanuary 1 2023\t $ 60,000 \t $ 38,400 \t $ 21,600 \t $ 420,000
\nJanuary 1 2024\t $ 60,000 \t $ 33,600 \t $ 26,400 \t $ 360,000
\nJanuary 1 2025\t $ 60,000 \t $ 28,800 \t $ 31,200 \t $ 300,000
\nJanuary 1 2026\t $ 60,000 \t $ 24,000 \t $ 36,000 \t $ 240,000
\nJanuary 1 2027\t $ 60,000 \t $ 19,200 \t $ 40,800 \t $ 180,000
\nJanuary 1 2028\t $ 60,000 \t $ 14,400 \t $ 45,600 \t $ 120,000
\nJanuary 1 2029\t $ 60,000 \t $ 9,600 \t $ 50,400 \t $ 60,000
\nJanuary 1 2030\t $ 60,000 \t $ 4,800 \t $ 55,200 \t $ –
\nAssuming that Boarshead will do early adoption and adopt ASU 2016-2 in 2018, liabilities and assets will need to be reported in the 2017 and 2018 comparative financial statements
\nBoarshead Corporation Balance Sheet extract 2017
\nAssets
\nLeased Asset \u2013Facility
\nLess accumulated Depreciation
\nLeased Asset – Equipment
\n900,000
\n(90,000)
\n250,000
\nLess accumulated Depreciation\t(92,000)<\/p>\n
Current liabilities
\nInterest payable-Capital lease\t9,720
\nInterest payable-Operating lease\t2400
\nLong Term Liabilities
\nLease obligation-equipment
\nLease obligation-Facility
\n121,720
\n780,000<\/p>\n
Boarshead Corporation Balance Sheet extract 2018
\nAssets
\nLeased Asset \u2013 Facility
\nLess accumulated Depreciation
\nLeased Asset – Equipment
\n900,000
\n(120,000)
\n250,000
\nLess accumulated Depreciation\t(138,000)
\nCurrent liabilities
\nInterest payable-equipment
\nInterest payable-facility\t7,303
\n2,400
\nLong Term Liabilities
\nLease obligation-equipment
\nLease obligation \u2013facility\t79,023
\n720,000
\nAssuming adoption in 2018, what journal entries will need to be made in 2018 for the transition to the new lease standard
\nBoarshead Corporation\tDebit\tCredit
\n12\/31\/18\tDepreciation expense -Equipment\t46,000
\nAccumulated depreciation – Equipment\t\t46,000
\n12\/31\/18\tDepreciation expense \u2013Facility\t30,000
\nAccumulated depreciation – Equipment\t\t30,000
\n12\/31\/2018\tInterest expense \u2013Equipment
\nInterest expense \u2013Facility\t9,720
\n2,400
\nInterest payable\t\t12,120<\/p>\n","protected":false},"excerpt":{"rendered":"
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