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You need to redo the Operating Lease slides. The "plug" entry for the Right of Use Asset should be a CREDIT. It needs to REDUCE the debit balance for ROA on the balance sheet.
Thanks for the vid! The process and/or nomenclature of accounting for the operating lease is a bit obtuse. Namely that we're crediting the lease liability an amount equivalent to the effective interest ($124,500 * 10%) and then debiting the least liability $50,000. I don't understand why. We can get the same result and account balances with a less ambiguous approach. Credit: Cash $50,000 | Debit: Interest Expense $12,450, Debit: Lease liability $37,550 Debit: Amortization of ROU $37,550 | Credit: ROU Asset $37,550 The Lease liability and ROU Asset carrying values work out to be the same , and the Interest Expense + Amortization of ROU expense is equivalent to lease expense on the earnings sheet.
When recording the Operating Lease, the Right of Use entry should be a credit instead of a debit. Thank you for this clear and concise explanation of how to record the different leases.
Hello Jeanie, thanks for reaching out! The Right of Use entry has to be a debit because it’s essentially a fixed asset. Then you have the credit to record the Lease Liability.
@@MaxwellCPAreview I believe what jeannie is referring to is the postings after the initial entry. in your video they are under the debit column but should be a plug figure within the credit side so as to write down the ROU asset to zero. Great video.
We are doing an entire chapter on this in Intermediate Accounting and it's almost making me want to quit Accounting. It goes into an insane amount of detail and my professor expects us to know every last detail. I appreciate a more simple explanation on this topic which assures me I haven't lost my mind. Thank you.
In operating lease 2nd journal entries, right to use account has to be credited so eventually at the end of lease it becomes zero, however in the video it is being debited
Hello Sridhar, thanks for reaching out! Are you referring to the summary chart of all the entries? I accidentally swapped the debits and credits there. Thanks for commenting!
Why don’t you take the first lease payment at lease commencement? Shouldn’t the year 2 journal entry be an interest expense of 10% * (124,500-50,000) = 74,500? Where 50,000 was the amount paid at lease commencement. Interest is not taken at year 1 since interest expense only occur with the passage of time, but I’m pretty sure the first lease payment is made at lease commencement and so the lease liability will reduce by the full $50,000
Hi Gabriella, that's a great question. If the question stated, "The lessee makes the first payment upon starting the lease" then absolutely that would be the case. In this question, since it doesn't state making a payment right at the beginning, then we don't need to decrease the lease liability by $50,000 right away. Thanks!
So , any additional entry after the lease end and the balance in Right to use the asset Zero? Should we record the asset in our book? Or the asset list?
an insta subscribe, i was trying to look for this explanation showing the difference in calculation for the asc 842 for both operation and finance leases but couldn't find it in youtube. your explanation and example were both simple. Thanks a lot
That is so kind of you, Sagar! I am so glad that it helped out. I struggled initially to find the differences between them too, which is why I wanted to make this video.
Amazing video! Can you please a criteria testing in spreadsheet to show us the whole process and how it should be disclosed? 2:35 also on 11:49 can you please create the complete journal entries? Is expense debited and credited to lease liability? Just want to confirm 😅
Great video! However the 2nd JE on the operating lease had me so confused for a few minutes! Haha the devil's in the details in our field isn't it? Love your content though, this definitely gave a simple and concise explanation of ASC 842.
Hi Carla! Ah yes, I totally flipped around the entry when I show the summary of it. I wish I could edit that part of the video but TH-cam doesn’t let you. I will put a caption over that part that clarifies the error. I’m so glad the video helped you understand lease accounting a little better! - Kyle
QUESTION re the Financing Lease. I had $212 left over Interest Expense, so my Lease Liability did NOT get down to $0. What did you do to resolve that? Asking on 8/8/2024. Many thanks!
Hi Kyle, how do you record lease agreement for office space under the new requirement ASC 842 if you do not have interest rate, implicit rate-- just the term of the lease 3yrs, and monthly payment (8,000) with 10% increase if the lessee want to renew the lease. How to determine in this case implicit rate if I only have this information for the lease agreement???
In operating lease calculation. the 3 year ROU plug ins does not equal $124500 to totally wipe out the ROU account. Can you explain why the difference?
Why the Right to use asset is amortized by the lessee over the life of assets instead of lease term. The lessee won't have any lease liability or right to use after 3 years.. right? pls explain?
Hi, thank you for this thorough lecture. Why was the Lease Liability credited against the Interest Expense? Isn't the Interest Expense supposed to be paid in Cash to the Lessor?
You are absolutely right. I did the same and got the same results. Also, the reduction method is better in terms of entry and calculation of the ending Lease Liability. To illustrate, at the end of Year 2, the entry will be Dr. Interest Expense 12,450 Dr. Lease Liability 37,350 (difference between the annual payment (50,000 -12,4500) Cr. Cash 50,000 Then it is easy to get the ending carrying value of the Lease Liability= 124,500-37,350= $86,950. We used only one entry and saved time.
Hi Alex, you make an excellent point! I see what you're saying, the debits are where the credits should be. Thank you so much for helping me to see this!
@@MaxwellCPAreview Yep I tried to calculate the initial lease liability with the PV formula in excel and it resulted in zero at the end. Formula is =PV(10%,3,50000) This equals $124,342.60
Good question. I believe it depends on whether the sales tax is included in the lease payment amount, in which case it would be capitalized. If it's not included in the payment, then it can be directly expensed.
Yes, for an operating lease it could be different, if you are giving incentives such as free months during the lease. This would cause the two to be different.
Great video. Question for you if you don't mind: What if there is a pre payment at commencement, for let's say 3 months? When would you start amortizing the lease liability? Would it be in month 4?
Thank you, Charles! Great question. For an operating lease, the lease expense is the total payments evenly divided. So even though you pay for 3 months at the beginning, your expense would be for a lower amount.
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💼 Pass the CPA Exam for just $399! (Regular price: $799)
👉 Sign up now: courses.maxwellcpareview.com/bundles/comprehensive-cpa-exam-review-course-2024
📅 Offer Valid: Black Friday, Nov. 29 - Cyber Monday, Dec. 2
You need to redo the Operating Lease slides. The "plug" entry for the Right of Use Asset should be a CREDIT. It needs to REDUCE the debit balance for ROA on the balance sheet.
Good call, the ROU Asset should indeed be credited instead of debited. Thanks for helping me to see this.
You should really redo this video chief if I didn’t see this comment I’d be maaaad confused rn
@@jmay5354Chief?? I think you meant Mr. Ashcraft.
Thanks for the vid! The process and/or nomenclature of accounting for the operating lease is a bit obtuse. Namely that we're crediting the lease liability an amount equivalent to the effective interest ($124,500 * 10%) and then debiting the least liability $50,000. I don't understand why. We can get the same result and account balances with a less ambiguous approach.
Credit: Cash $50,000 | Debit: Interest Expense $12,450, Debit: Lease liability $37,550
Debit: Amortization of ROU $37,550 | Credit: ROU Asset $37,550
The Lease liability and ROU Asset carrying values work out to be the same , and the Interest Expense + Amortization of ROU expense is equivalent to lease expense on the earnings sheet.
When recording the Operating Lease, the Right of Use entry should be a credit instead of a debit. Thank you for this clear and concise explanation of how to record the different leases.
Hello Jeanie, thanks for reaching out! The Right of Use entry has to be a debit because it’s essentially a fixed asset. Then you have the credit to record the Lease Liability.
@@MaxwellCPAreview I believe what jeannie is referring to is the postings after the initial entry. in your video they are under the debit column but should be a plug figure within the credit side so as to write down the ROU asset to zero. Great video.
^^^^ @maxwell CPA Review
This one confused me too for a while...then I remembered reading your comment
@@MaxwellCPAreviewyes but the subsequent entry should reduce the asset. Otherwise your entry doesn’t balance.
We are doing an entire chapter on this in Intermediate Accounting and it's almost making me want to quit Accounting. It goes into an insane amount of detail and my professor expects us to know every last detail. I appreciate a more simple explanation on this topic which assures me I haven't lost my mind. Thank you.
This Video safed my life in my Financial Accounting exam ❤️
That is so encouraging to hear! Thanks so much!
Great video, so essentially, the answer is 45,645. As year 1 starts on day 1 of the lease term.
Thanks Elizabeth! Yes, that's correct!
Thank YOU SO MUCH!! Keep forgetting about lease accounting
You're welcome!
In operating lease 2nd journal entries, right to use account has to be credited so eventually at the end of lease it becomes zero, however in the video it is being debited
Hello Sridhar, thanks for reaching out! Are you referring to the summary chart of all the entries? I accidentally swapped the debits and credits there. Thanks for commenting!
Sridhar is referring to the third line in the shot at ~11:20, debiting instead of crediting ROU.
Thank you for this video, it was very helpful. Well done.
Thank you very much for making it so easy to understand!
This was extremely helpful! Thank you for sharing.
Thank you so much for letting me know! Best of luck in your studies.
Thank you so much, this was so easy to understand and follow!
I really appreciate that!
Awesome explanation
Thank you for sharing.
Why don’t you take the first lease payment at lease commencement? Shouldn’t the year 2 journal entry be an interest expense of 10% * (124,500-50,000) = 74,500? Where 50,000 was the amount paid at lease commencement. Interest is not taken at year 1 since interest expense only occur with the passage of time, but I’m pretty sure the first lease payment is made at lease commencement and so the lease liability will reduce by the full $50,000
Hi Gabriella, that's a great question. If the question stated, "The lessee makes the first payment upon starting the lease" then absolutely that would be the case. In this question, since it doesn't state making a payment right at the beginning, then we don't need to decrease the lease liability by $50,000 right away. Thanks!
So , any additional entry after the lease end and the balance in Right to use the asset Zero? Should we record the asset in our book? Or the asset list?
an insta subscribe, i was trying to look for this explanation showing the difference in calculation for the asc 842 for both operation and finance leases but couldn't find it in youtube. your explanation and example were both simple. Thanks a lot
That is so kind of you, Sagar! I am so glad that it helped out. I struggled initially to find the differences between them too, which is why I wanted to make this video.
Amazing video! Can you please a criteria testing in spreadsheet to show us the whole process and how it should be disclosed? 2:35 also on 11:49 can you please create the complete journal entries? Is expense debited and credited to lease liability? Just want to confirm 😅
this video really helped me, thanks a lot! I really appreciate your content, keep it up!
In finance lease can't we consider lease term or life of asset whichever shorter ?
thanks for making easy to understand
Hello Hung, I'm so glad the video helped! That's my main goal, to make these accounting concepts as clear as possible. Thanks for reaching out.
Great video! However the 2nd JE on the operating lease had me so confused for a few minutes! Haha the devil's in the details in our field isn't it? Love your content though, this definitely gave a simple and concise explanation of ASC 842.
Hi Carla! Ah yes, I totally flipped around the entry when I show the summary of it. I wish I could edit that part of the video but TH-cam doesn’t let you. I will put a caption over that part that clarifies the error. I’m so glad the video helped you understand lease accounting a little better! - Kyle
@@MaxwellCPAreview Couldn't you just simply re-upload the video? 😛 Come on man.... it's a CPA review course.
Why amortization expense applied to coffie machine which is tangle asset?
Does the decrease in ROU ALWAYS equal to the decrease in Lease liability every year? In what situation would they be different?
Great video, it was very easy to follow!
Thank you, Navaneet! I am so glad to hear, thank you for letting me know!
Hey can you provide more questions on lease
Thank you so much for this wonderful topic.
Thank you for kind feedback!
QUESTION re the Financing Lease. I had $212 left over Interest Expense, so my Lease Liability did NOT get down to $0. What did you do to resolve that? Asking on 8/8/2024. Many thanks!
Hi Kyle, how do you record lease agreement for office space under the new requirement ASC 842 if you do not have interest rate, implicit rate-- just the term of the lease 3yrs, and monthly payment (8,000) with 10% increase if the lessee want to renew the lease.
How to determine in this case implicit rate if I only have this information for the lease agreement???
Would appreciate if you can provide lessor accounting impact as well and the other aspects like lease termination/ payoffs.
Thank you!
In operating lease calculation. the 3 year ROU plug ins does not equal $124500 to totally wipe out the ROU account. Can you explain why the difference?
Is this IFRS or GAAP?
Hi. Can you please throw some light on where is deferred rent reflected under ASC 842?
My understanding is that deferred rent would be recorded within the carrying value of the lease (lease liability).
Why the Right to use asset is amortized by the lessee over the life of assets instead of lease term. The lessee won't have any lease liability or right to use after 3 years.. right? pls explain?
can you explain “payments on capital lease” in cash flow statement
That's for the "principal" portion of the finance lease. Not the interest portion.
Thank you for share
Great video ,thanks
Thank you!
How do we account for Vat on finace lease ?
This video is specific to US leases, which do not have any VAT tax.
Thankyou so much
You are very welcome!
Hi, thank you for this thorough lecture. Why was the Lease Liability credited against the Interest Expense? Isn't the Interest Expense supposed to be paid in Cash to the Lessor?
Hi Hala, the lease liability increases by interest expense and decreases with the cash payment. Keep in mind those two effects on it.
I see a carrying value of $209.50 on end of 4th year. Carrying value at end of 3rd Year $45,645+$4,564-$50,000=$209.50. Why is that?
Similar carrying value with mine too
You are absolutely right. I did the same and got the same results. Also, the reduction method is better in terms of entry and calculation of the ending Lease Liability. To illustrate, at the end of Year 2, the entry will be
Dr. Interest Expense 12,450
Dr. Lease Liability 37,350 (difference between the annual payment (50,000 -12,4500)
Cr. Cash 50,000
Then it is easy to get the ending carrying value of the Lease Liability= 124,500-37,350= $86,950. We used only one entry and saved time.
ROU asset should get credited during Y2,3 and 4 with the plug amount, right.. why are you showing debited
You are correct, the ROU Asset should be credited throughout its life. The debit is simply an error.
What if am given direct costs in the question? How do I treat them
Direct costs are not used in calculating the pv of the right of use asset, they are expensed.
Correct, you directly expense the direct costs. The lease liability is focused solely on the present value of the lease payments.
Hi Kyle, good video, however, your entries for operating lease do not balance, asset reduction is on incorrect side, Dr.
Hi Alex, you make an excellent point! I see what you're saying, the debits are where the credits should be. Thank you so much for helping me to see this!
operating lease, your numbers of both ROU asset and Liabilities won't be zero at the end of year 4. There is $210 left. what is the reason?
Good catch. This is just due to a rounding error because when I found the present value I rounded the PV factor.
@@MaxwellCPAreview Yep I tried to calculate the initial lease liability with the PV formula in excel and it resulted in zero at the end. Formula is =PV(10%,3,50000) This equals $124,342.60
Is Sales tax on the lease payment a current expense, or is it supposed to be capitalized?
Good question. I believe it depends on whether the sales tax is included in the lease payment amount, in which case it would be capitalized. If it's not included in the payment, then it can be directly expensed.
How do we account for the lease expense in I.S
Lease expense would be in the G&A Expenses.
I think, the ROU amortization amount for finance lease is not correct, it should be 41500.
When the title is expected to be transferred, the leased asset is depreciated over its useful life instead of the lease term.
Can cash paid be different than lease expense?
Yes, for an operating lease it could be different, if you are giving incentives such as free months during the lease. This would cause the two to be different.
Why is Becker not this simple?
On the second operating example you are incorrect on the entries.. Not a great way to explain how to do the problem.
Hey Roby, thanks for the comment! That is correct, the right of use asset should be credited instead of debited. Thanks for watching!
Great video. Question for you if you don't mind: What if there is a pre payment at commencement, for let's say 3 months? When would you start amortizing the lease liability? Would it be in month 4?
Thank you, Charles! Great question. For an operating lease, the lease expense is the total payments evenly divided. So even though you pay for 3 months at the beginning, your expense would be for a lower amount.
0:48
You need to take this down until you can get your debits and credits in the correct column. Too confusing for those seeking guidance.
Fr though this confused me so hard for the operating leases section!!