Question

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Taylor account for this lease modification

Answer 1

Answer: $ 200 000 will be treated as an expense

Explanation:

operating lease agreement is a lease where one Party (lessor)  allows another party to use an asset without transferring ownership of the asset to the lessee.

Operating lease rental payments are treated as an expense in the financial statements because the company on pays for the use the asset.

The lease modifications will be treated as an expense because the lease is an operating lease agreement. The $200000 increase of Lease payments will be treated as an expense.