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Expense Lease Termination Example
When an expense lease is terminated earlier than the original end date, the gain or loss on the termination is recognized in the same way as if the lease is modified. This lease uses the ASC 842 accounting standard. For more information, see Expense Lease Payment Increase Example.
Review the following example to see how the journal entries record the gain or loss for a lease that is terminated.
An expense lease has the following information:
- Start date: January 1, 2019
- ROU Asset and Lease Liability at that time is 700,000
On December 31, 2019, the loan is terminated earlier. The remaining amounts are as follows:
- ROU Asset : 48,000
- Lease Liability: 56,000
Since the lease is terminated, the lease liability amount is zero.
| December 31, 2019 | |||
| Debit | Credit | Description | |
| Lease Liability | 56,000 | ||
| ROU Asset | 48,000 | ||
| Gain on Modification | 8,000 | 56,000 - 48,000 | |
Finance Lease using ASC 842 or IFRS 16
When an expense lease is terminated earlier than the original end date and uses the ASC 842 or IFRS 16 accounting standard, the following values are calculated:
- Lease Liability: The lease liability balance as of the termination date.
- ROU Asset: The balance of the ROU asset account calculated as follows: initial ROU Asset account amount - amount recorded with the lease modification.
- ROU Asset Accumulated Amortization: The balance in the accumulative amortization account. Displays the sum of amortization expense amounts from the beginning of the lease until the termination date (finance lease).
- Gain/loss on termination: The difference between the three other accounts to balance the journal entries.
Review the following distribution to see how the journal entries record the gain or loss for a lease that is terminated.
| July 1, 2019 | |||
| Debit | Credit | ||
| Lease Liability | 11 683.21 | ||
| ROU Asset Accumulative Amortization | 20 849.81 | ||
| ROU Asset | 28 958.07 | ||
| Gain/Loss on Modification | 3 574.95 | ||
