Question
On January 1, 2026 Wrenfield Media leased a recording studio for 3 years. It pays $30,000 at the end of each year. The lease does not transfer ownership, contains no purchase option, and does not meet any other finance-lease criterion, so under ASC 842 it is an operating lease.
Wrenfield's incremental borrowing rate is 5%. The present value of the lease payments at that rate is $81,697. Round all amounts to the nearest dollar.
Required:
- Record the lease at commencement on January 1, 2026, using Right-of-Use Asset and Lease Liability.
- Record the first payment on December 31, 2026 as a single compound entry: debit Lease Expense and Lease Liability; credit Cash and Right-of-Use Asset.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach Leases
IFRS 16 — Leases
A lessee recognises a right-of-use asset and a lease liability at commencement, the liability being the present value of the remaining lease payments. The asset then depreciates while the liability unwinds at the discount rate, which is why the two balances diverge over the term.
Common mistakes
- Splitting a payment between interest and principal using the payment date rather than the opening liability and the rate.
- Depreciating the right-of-use asset over the asset's useful life when the term is shorter and ownership does not transfer.
- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.
IFRS vs US GAAP: US GAAP keeps a finance/operating distinction for lessees with a single straight-line expense for operating leases; IFRS 16 uses one model.
Further readingIFRS 16: leases, with journal entries