Question
On January 1, 2026 Cobblefield Manufacturing leased a CNC milling machine for 4 years. The four annual payments of $25,000 are due at the start of each year, the first on January 1, 2026. Ownership of the machine transfers to Cobblefield at the end of the lease, so under ASC 842 this is a finance lease. The machine has a useful life of 5 years and no residual value.
The rate implicit in the lease is 6%, and the present value of the payments is $91,825. Round to the nearest dollar.
Required:
- On January 1, 2026: recognize the lease (Right-of-Use Asset, Lease Liability), then record the first payment.
- On December 31, 2026: accrue the year's interest by crediting Lease Liability (the next payment is not due until January 1), and record amortization using Amortization Expense and Accumulated Amortization - 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- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.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