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Posted: January 31st, 2023

Memorandum To: Don Collizi President, Boarshead Corporation From: Janet Wilt, CPA Date: 05 May 2018 Subject: new lease requirements and Transition Introduction According to the new standard a lease is defined as either 1. contract, 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.” 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) 2. convey the right to control the use of the asset over the lease term (this depends on a customer’s right to obtain substantially all the economic benefits from use of the identified asset while having the right to direct its use). The standard Transition The 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. As 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. Boarshead early adoption of ASU 2016-2 in 2018 If the firm adopts the early treatment of the standards, the reporting of the lease agreements will be reported as follows Capital Lease Accounting – Equipment year Payment Interest Principal balance January 1 2016 $ 250,000 January 1 2016 $ 50,000 $ 50,000 $ 200,000 January 1 2017 $ 50,000 $ 12,000 $ 38,000 $ 162,000 January 1 2018 $ 50,000 $ 9,720 $ 40,280 $ 121,720 January 1 2019 $ 50,000 $ 7,303 $ 42,697 $ 79,023 January 1 2020 $ 50,000 $ 4,741 $ 45,259 $ 33,765 January 1 2021 $ 20,000 $ 2,026 $ 17,974 $ 15,790 Capital Lease Accounting – Facility year Payment Interest Principal balance January 1 2015 $ 900,000 January 1 2015 $ 60,000 $ 900,000 January 1 2016 $ 60,000 $ 72,000 $ (12,000) $ 840,000 January 1 2017 $ 60,000 $ 67,200 $ (7,200) $ 780,000 January 1 2018 $ 60,000 $ 62,400 $ (2,400) $ 720,000 January 1 2019 $ 60,000 $ 57,600 $ 2,400 $ 660,000 January 1 2020 $ 60,000 $ 52,800 $ 7,200 $ 600,000 January 1 2021 $ 60,000 $ 48,000 $ 12,000 $ 540,000 January 1 2022 $ 60,000 $ 43,200 $ 16,800 $ 480,000 January 1 2023 $ 60,000 $ 38,400 $ 21,600 $ 420,000 January 1 2024 $ 60,000 $ 33,600 $ 26,400 $ 360,000 January 1 2025 $ 60,000 $ 28,800 $ 31,200 $ 300,000 January 1 2026 $ 60,000 $ 24,000 $ 36,000 $ 240,000 January 1 2027 $ 60,000 $ 19,200 $ 40,800 $ 180,000 January 1 2028 $ 60,000 $ 14,400 $ 45,600 $ 120,000 January 1 2029 $ 60,000 $ 9,600 $ 50,400 $ 60,000 January 1 2030 $ 60,000 $ 4,800 $ 55,200 $ – Assuming 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 Boarshead Corporation Balance Sheet extract 2017 Assets Leased Asset –Facility Less accumulated Depreciation Leased Asset – Equipment 900,000 (90,000) 250,000 Less accumulated Depreciation (92,000) Current liabilities Interest payable-Capital lease 9,720 Interest payable-Operating lease 2400 Long Term Liabilities Lease obligation-equipment Lease obligation-Facility 121,720 780,000 Boarshead Corporation Balance Sheet extract 2018 Assets Leased Asset – Facility Less accumulated Depreciation Leased Asset – Equipment 900,000 (120,000) 250,000 Less accumulated Depreciation (138,000) Current liabilities Interest payable-equipment Interest payable-facility 7,303 2,400 Long Term Liabilities Lease obligation-equipment Lease obligation –facility 79,023 720,000 Assuming adoption in 2018, what journal entries will need to be made in 2018 for the transition to the new lease standard Boarshead Corporation Debit Credit 12/31/18 Depreciation expense -Equipment 46,000 Accumulated depreciation – Equipment 46,000 12/31/18 Depreciation expense –Facility 30,000 Accumulated depreciation – Equipment 30,000 12/31/2018 Interest expense –Equipment Interest expense –Facility 9,720 2,400 Interest payable 12,120

Memorandum

To: Don Collizi
President, Boarshead Corporation
From: Janet Wilt, CPA
Date: 05 May 2018
Subject: new lease requirements and Transition
Introduction
According to the new standard a lease is defined as either
1. contract, 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.” 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)
2. convey the right to control the use of the asset over the lease term (this depends on a customer’s right to obtain substantially all the economic benefits from use of the identified asset while having the right to direct its use).
The standard Transition
The 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.
As 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.
Boarshead early adoption of ASU 2016-2 in 2018
If the firm adopts the early treatment of the standards, the reporting of the lease agreements will be reported as follows
Capital Lease Accounting – Equipment
year Payment Interest Principal balance
January 1 2016 $ 250,000
January 1 2016 $ 50,000 $ 50,000 $ 200,000
January 1 2017 $ 50,000 $ 12,000 $ 38,000 $ 162,000
January 1 2018 $ 50,000 $ 9,720 $ 40,280 $ 121,720
January 1 2019 $ 50,000 $ 7,303 $ 42,697 $ 79,023
January 1 2020 $ 50,000 $ 4,741 $ 45,259 $ 33,765
January 1 2021 $ 20,000 $ 2,026 $ 17,974 $ 15,790

Capital Lease Accounting – Facility
year Payment Interest Principal balance
January 1 2015 $ 900,000
January 1 2015 $ 60,000 $ 900,000
January 1 2016 $ 60,000 $ 72,000 $ (12,000) $ 840,000
January 1 2017 $ 60,000 $ 67,200 $ (7,200) $ 780,000
January 1 2018 $ 60,000 $ 62,400 $ (2,400) $ 720,000
January 1 2019 $ 60,000 $ 57,600 $ 2,400 $ 660,000
January 1 2020 $ 60,000 $ 52,800 $ 7,200 $ 600,000
January 1 2021 $ 60,000 $ 48,000 $ 12,000 $ 540,000
January 1 2022 $ 60,000 $ 43,200 $ 16,800 $ 480,000
January 1 2023 $ 60,000 $ 38,400 $ 21,600 $ 420,000
January 1 2024 $ 60,000 $ 33,600 $ 26,400 $ 360,000
January 1 2025 $ 60,000 $ 28,800 $ 31,200 $ 300,000
January 1 2026 $ 60,000 $ 24,000 $ 36,000 $ 240,000
January 1 2027 $ 60,000 $ 19,200 $ 40,800 $ 180,000
January 1 2028 $ 60,000 $ 14,400 $ 45,600 $ 120,000
January 1 2029 $ 60,000 $ 9,600 $ 50,400 $ 60,000
January 1 2030 $ 60,000 $ 4,800 $ 55,200 $ –
Assuming 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
Boarshead Corporation Balance Sheet extract 2017
Assets
Leased Asset –Facility
Less accumulated Depreciation
Leased Asset – Equipment
900,000
(90,000)
250,000
Less accumulated Depreciation (92,000)

Current liabilities
Interest payable-Capital lease 9,720
Interest payable-Operating lease 2400
Long Term Liabilities
Lease obligation-equipment
Lease obligation-Facility
121,720
780,000

Boarshead Corporation Balance Sheet extract 2018
Assets
Leased Asset – Facility
Less accumulated Depreciation
Leased Asset – Equipment
900,000
(120,000)
250,000
Less accumulated Depreciation (138,000)
Current liabilities
Interest payable-equipment
Interest payable-facility 7,303
2,400
Long Term Liabilities
Lease obligation-equipment
Lease obligation –facility 79,023
720,000
Assuming adoption in 2018, what journal entries will need to be made in 2018 for the transition to the new lease standard
Boarshead Corporation Debit Credit
12/31/18 Depreciation expense -Equipment 46,000
Accumulated depreciation – Equipment 46,000
12/31/18 Depreciation expense –Facility 30,000
Accumulated depreciation – Equipment 30,000
12/31/2018 Interest expense –Equipment
Interest expense –Facility 9,720
2,400
Interest payable 12,120

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