Expense Lease Payment Increase Example

When expense lease payment amounts vary and the amounts are known at the time of setup, the amount of the lease payment is used in all loan calculations. For an example, see ROU Asset Recognition and Processing Example.

When the lease payment amount is changed after the lease commencement date (for example, the CPI has increased), the calculations for the ROU asset, liabilities, interest, and amortization components is the same. However, the differences between the old and new lease payment amounts are recorded in the Variable Rent Expense account.

The following changes can also occur when an expense lease is modified: 

  • Additional lines might be inserted into the price adjustment table
  • If the initial journal entry has been created and a term is added, the loan liability and ROU must be remeasured

For example, a nine-year operating lease has an initial up front payment of 100,000, and a discount rate of 8.98%.

  • NVP of 100,000 payments for nine years: 700,000
Lease Payment Table
ROU Asset 700,000  
Lease Liability   700,000

The operating lease expense: 100,000 annually

  • Year 1 Interest Paid: (700,000 -100,000) x 8.98% = 53,880
  • Year 1 Amortization Component: 100,000 – 62,860 = 46,120
Lease Payment Table
Year 1 invoice
Lease Liability 100,000   First year payment
AP   100,000 First year payment
Year 1 journal entries  
Lease Expense 111,667   Interest Expense from the ROU Asset calculation
Lease Liability   53,880 First year Interest Paid
ROU Asset   46,120 First year Amortization Component

After the first year, the lease payment is increased to 105,000 (due to CPI changes). The lease liability and ROU are not remeasured.

  • Year 2 Interest Paid: (700,000 -100,000 + 53,880 - 100,000) x 8.98% = 49,738
  • Year 2 Amortization Component: 100,000 – 49,738 = 50,262
Lease Payment Table
Year 2 invoice
Lease Liability 105,000   Second year payment
AP   105,000 Second year payment
Year 2 journal entries
Lease Expense 100,000   Interest Expense from the ROU Asset calculation
Variable Rent Expense 5,000    
Lease Liability   49,738 Second year Interest Paid
ROU Asset   50,262 Second year Amortization Component
Lease Liability   5,000