On January 1, 2017, Bonduris Company leases warehouse space in Oakland, CA. The

Question

On January 1, 2017, Bonduris Company leases warehouse space in Oakland, CA. The lease is for six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay $15,000 on January 1, 2017. The lease calls for subsequent rent payments to increase 10% per year. For example, the January 1, 2018 payment will be $16,500, and the January 1, 2019 payment will be $18,150. Bonduris has adopted early ASC 842 and has appropriately classified the lease as an operating lease. Bonduris has a calendar reporting year and an incremental borrowing rate of 7%. Bonduris uses straight-line amortization for its long-lived assets. Ignore current and non currrent classification for this exercise. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

1-What journal entries should Bonduris make at January 1, 2017, to record the effects of the lease?

2-Prepare Bonduris’s amortization table for the leased warehouse.

3-What is the balance of the lease liability on January 1, 2018, after Bonduris makes the rent payment?

4-What is the balance of the right-of-use asset on January 1, 2018, after Bonduris makes the rent payment?

Explanation / Answer

Workings:

1-What journal entries should Bonduris make on January 1, 2017, to record the effects of the lease?

2-Prepare Bonduris’s amortization table for the leased warehouse.

3-What is the balance of the lease liability on January 1, 2018, after Bonduris makes the rent payment?

Lease liability on January 1, 2018, will be 70,757.99 as per above table

4-What is the balance of the right-of-use asset on January 1, 2018, after Bonduris makes the rent payment?

The balance of the right-of-use asset on January 1, 2018, will be 82,968.90 as per above table.

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Years Lease Rental Present Value factor Present Value of LR 1                 15,000.00 1                      15,000.00 2                 16,500.00 0.93458                      15,420.57 3                 18,150.00 0.87344                      15,852.94 4                 19,965.00 0.8163                      16,297.43 5                 21,961.50 0.7629                      16,754.43 6                 24,157.65 0.71299                      17,224.16 Present Value of Lease Rental                      96,549.53

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