{"id":1733,"date":"2021-11-12T09:12:00","date_gmt":"2021-11-12T16:12:00","guid":{"rendered":"https:\/\/cmcdllc.com\/?p=1733"},"modified":"2021-12-02T09:18:09","modified_gmt":"2021-12-02T16:18:09","slug":"accounting-for-operating-lease-under-new-lease-standard","status":"publish","type":"post","link":"https:\/\/cmcdllc.com\/?p=1733","title":{"rendered":"Accounting for Operating Lease under new Lease Standard"},"content":{"rendered":"\n<p>Under the new Lease Standard, which is effective since year 2022, any operating lease with term greater than 12 months must be capitalized and recorded in balance sheet as <em>Right-of-Use Asset<\/em> and <em>Lease Liability<\/em>. After that, the <em>Right-of-Use Asset<\/em> will be amortized on a straight-line basis over the term of the lease. If a business has several operating leases, it will have to monitor and amortize each lease separately.<\/p>\n\n\n\n<p>The following example will demonstrate how to account for operating lease. Followings are some basic knowledge about calculating the lease.<\/p>\n\n\n\n<ul><li><strong>Lease Liability = Present value of all future lease payments<\/strong><\/li><li><strong>Right-of-Use Asset = Lease Liability + Initial costs <\/strong><em>(if any)<\/em><strong> + Pre-payments <\/strong><em>(if any)<\/em><strong> \u2013 Lease incentives <\/strong><em>(if any)<\/em><strong><\/strong><\/li><\/ul>\n\n\n\n<p><strong><u>Assumptions:<\/u><\/strong><\/p>\n\n\n\n<ul><li>You lease an office for 3 years (or 36 months), starting 1\/1\/2022.<\/li><li>Monthly rent is $5,000 payable on the 1<sup>st<\/sup> day of each month.<\/li><li>Your borrowing interest rate is 6%\/year.<\/li><\/ul>\n\n\n\n<p><strong><u>Calculations of the lease:<\/u><\/strong><\/p>\n\n\n\n<ul><li>On 1\/1\/2022, you will make the first rent payment of $5,000; that means you will have 35 monthly rent payments in future.<\/li><li>As of 1\/1\/2022, the present value of the 35 payments at 6% interest rate is <strong>$160,176.86<\/strong> (you can use Excel to calculate this amount).<\/li><li>So we have: <strong>Lease Liability = Right-of-Use Asset = $160,176.86<\/strong><\/li><\/ul>\n\n\n\n<p><strong><u>Journal entries for the operating lease:<\/u><\/strong><\/p>\n\n\n\n<p><strong>On 1\/1\/2022:<\/strong><\/p>\n\n\n\n<ul><li>Record the first rent payment:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Rent Expense<\/td><td>5,000<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Cash<\/td><td>&nbsp;<\/td><td>5,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<ul><li>Record the lease liability and asset:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Right-of-Use Asset<\/td><td>160,176.86<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Lease Liability<\/td><td>&nbsp;<\/td><td>160,176.86<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>On 2\/1\/2022:<\/strong><\/p>\n\n\n\n<ul><li>Record the rent payment:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Lease Liability<\/td><td>5,000<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Cash<\/td><td>&nbsp;<\/td><td>5,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<ul><li>Record the amortization:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Rent expense<\/td><td>5,000<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Lease Liability<\/td><td>&nbsp;<\/td><td>800.88<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Right-of-Use Asset<\/td><td>&nbsp;<\/td><td>4,199.12<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><em><u>Notes:<\/u><\/em><\/p>\n\n\n\n<ul><li><em>Amortized lease liability: 160,176.86 x (6%\/12) = 800.88<\/em><ul><li><em>Amortized right-of-use asset: 5,000 \u2013 800.88 = 4,199.12<\/em><\/li><\/ul><\/li><\/ul>\n\n\n\n<p>After these journal entries, the balances of Right-of-Use Asset and Lease Liability are as follows:<\/p>\n\n\n\n<ul><li>Right-of-Use Asset: 160,176.86 \u2013 4,199.12 = 155,977.74<\/li><li>Lease Liability: 160,176.86 \u2013 5,000 + 800.88 = 155,977.74<\/li><\/ul>\n\n\n\n<p><strong>On 3\/1\/2022:<\/strong><\/p>\n\n\n\n<ul><li>Record the rent payment:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Lease Liability<\/td><td>5,000<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Cash<\/td><td>&nbsp;<\/td><td>5,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<ul><li>Record the amortization:<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><em>&nbsp;<\/em><\/td><td><em>Debit<\/em><\/td><td><em>Credit<\/em><\/td><\/tr><tr><td>Rent expense<\/td><td>5,000<\/td><td>&nbsp;<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Lease Liability<\/td><td>&nbsp;<\/td><td>779.89<\/td><\/tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Right-of-Use Asset<\/td><td>&nbsp;<\/td><td>4,220.11<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><em><u>Notes:<\/u><\/em><\/p>\n\n\n\n<ul><li><em>Amortized lease liability: 155,977.74 x (6%\/12) = 779.89<\/em><ul><li><em>Amortized right-of-use asset: 5,000 \u2013 779.89 = 4,220.11<\/em><\/li><\/ul><\/li><\/ul>\n\n\n\n<p>After these journal entries, the balances of Right-of-Use Asset and Lease Liability are as follows:<\/p>\n\n\n\n<ul><li>Right-of-Use Asset: 155,977.74 \u2013 4,220.11 = 151,757.63<\/li><li>Lease Liability: 155,977.74 \u2013 5,000 + 779.89 = 151,757.63<\/li><\/ul>\n\n\n\n<p>You continue to record these journal entries every month until the last rent payment on 12\/1\/2024. At this time, the Right-of-Use Asset and Lease Liability will be completely written off and their balances are zero.<\/p>\n\n\n\n<p><em>(Attached is an illustrative Excel spreadsheet for all journal entries from the first to the last rent payment).<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Under the new Lease Standard, which is effective since year 2022, any operating lease with term greater than 12 months must be capitalized and recorded in balance sheet as Right-of-Use Asset and Lease Liability. After that, the Right-of-Use Asset will be amortized on a straight-line basis over the term of the lease. If a business [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"_links":{"self":[{"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/posts\/1733"}],"collection":[{"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1733"}],"version-history":[{"count":1,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/posts\/1733\/revisions"}],"predecessor-version":[{"id":1734,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=\/wp\/v2\/posts\/1733\/revisions\/1734"}],"wp:attachment":[{"href":"https:\/\/cmcdllc.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1733"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1733"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cmcdllc.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1733"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}