I just want all the calculatons to be correct and all work shown with amorization schedules and balance sheet with the letter:
1. Case Project Directions
You are replying to a client inquiry. You can reply in letter format or memo format. I do not care which one. I do not have a preferred format. That is up to your group. If you do a google search, you will find many different memo and letter formats. Just make sure your letter or memo looks professional.
There is no length requirement. I see it being a two to three page letter. You will be showing some journal entries, and they will take up some space. Be sure to touch on when the new standard goes into effect and talk about the transition to the new standard. You need to make mention to retrospective or prospective treatment, and explain how that treatment will apply to Boarshead.
There are many ways to find this information. Our book makes mention to this, though it does not show the entries needed for the change. Recognize that our book taught the new standard that has not gone into effect yet. In the appendix to the chapter it teaches the old standard. Under the old standard, we did not record a lease liability for operating leases. We just debited lease expense and credited cash. The new standard is what we learned, where we do record a Right-of-Use Asset and record the liability. What we refer to as a Capital Lease under the old standard is referred to as Finance-Type Lease under the new standard, and accounting for them has changed very little, except for what we name the accounts, and it is now amortization of the asset, not depreciation. You can get most of this from the book.
Also you can get information for this from reading the summary of the actual ASU 2016-2. This can be found on the FASB website, where the history of all AUSs can be found. ASU stands for Accounting Standard Update. I do not recommend reading the whole 300 page update. It gets into a lot of topics not relevant to this case. But in the update, there is a section on transition to the new standard, and it does give examples on how the transition should work.
Another way to get this information is just by doing a google search on the transition to ASU 2016-2 or the new lease standard. Almost all major CPA firms have letters to their clients on how to deal with this transition. You should be able to find a similar example.
How to Approach this as a Group
(Hint: An entry will need to be made for both types of leases.) (Another Hint: There is not an income impact for either.)
You Will need to do an amortization table for each of the leases (This will help you determine the lease liability balance on your balance sheet dates, December 31 2017 and 2018). you will need to do the transactions that will need to be recorded in 2018 to put the liability and asset on the books for the operating lease and need to restate the capital lease to the appropriate account names. Also you will need to determine the liability balances on December 31, 2017 and 2018. You will have to show the December 31, 2018 adjusting entries needed under the new lease standard. After all of that is done, the memo or letter needs to be written.
This may sound like a lot, but it is not, especially if you remember leases. The other part of this case . The longest part of this will be bringing back the memories of leases. You will find most information quickly in the book or by doing a google search and see what other CPA firms are telling their clients.
2. You are Janet Wilt, CPA. The president of one of your clients, Boarshead Corporation, emailed you the following message:
Janet,
I was at a conference today and they were talking about some new lease regulations and how that may impact our financial statements. I know that we have a couple of leases, one that we record as a liability and one that we do not. How will this new lease requirement impact us? When does this go into effect? Will we need to restate prior financial statements? Are there any retrospective entries that we have to make? If so, what are they and when do we need to record them? They also talked about adopting early. I may be interested in early adoption. What would we need to do to implement this change this year?
Don Collizi
President, Boarshead Corporation
Upon investigation of Boarshead's records, you found that Boarshead had had two leases. One that is currently being accounted for as a capital lease and one being treated as an operating lease (under current standards).
The capital lease was for equipment. The lease started in 2016 and was a 5-year lease of annual lease payments of $50,000, starting on January 1, 2016. The lease also had a bargain purchase option for $20,000 at the end of the lease. The equipment had a useful life of 6 years and Boarshead uses the straight-line method of depreciation. The implicit interest rate for this lease was 6%.
The operating lease was a 15-year lease for their facilities that started on January 1, 2015. The lease consisted of annual rental payments, starting on January 1, 2015 of $60,000. When they started the lease in 2015, the expected useful life of the facility was 30 years. Boarshead imputed interest rate is 8%.
Required:
Reply to Don Collizi. Write a memo or letter (use proper format for a letter or memo) to Don explaining the new lease requirements as they apply to Boarshead. Be sure to include the following:
1. Explain the transition rules (what will need to be done to adopt the new standard). Be sure to include adoption dates.
2. Assuming that Boarshead will do early adoption and adopt ASU 2016-2 in 2018, what liabilities and assets will need to be reported in the 2017 and 2018 comparative financial statements.
3. Assuming adoption in 2018, what journal entries will need to be made in 2018 for the transition to the new lease standard?
4. Assuming adoption in 2018, what are the new year-end (December 31, 2018) adjusting entries that will need to be made?