The Harris Company is the lessee on a four-year lease with the
following payments at the end of each year:
| Year 1: | $ | 11,500 |
| Year 2: | $ | 16,500 |
| Year 3: | $ | 21,500 |
| Year 4: | $ | 26,500 |
An appropriate discount rate is 7 percentage, yielding a present
value of $62,927.
a-1. If the lease is an operating lease, what will
be the initial value of the right-of-use asset?
a-2. If the lease is an operating lease, what will
be the initial value of the lease liability?
a-3. If the lease is an operating lease, what will
be the lease expense shown on the income statement at the end of
year 1?
a-1 In operating lease initial value will be present value of lease payment.
If the lease is an operating lease, the initial value of right-of-use assets = $62,927.
a-2 Here, initial value of lease liability is present value of lease payment.
If the lease is an operating lease, the initial value of lease liability = $62,927.
a-3 Lease expenses = sum(year 1 + year 2 + year 3 + year 4 ) / no. of years
= ($11,500 + $16,500 + $21,500 + $26,500) / 4
= $76,000 / 4
= $19,000
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