Under ASC 842, monthly journal entries for leases depend on whether the lease is classified as an operating lease or a finance lease. Here’s how to record monthly journal entries for both types of leases from the lessee’s perspective:
1. Monthly Journal Entries for Operating Lease (Lessee’s Perspective)
In an operating lease, the lessee records the lease expense on a straight-line basis over the lease term.
Example:
Scenario: A company enters into a 3-year operating lease for office space starting on January 1, 2024. The monthly lease payment is $1,200.
a. Monthly Lease Payment:
Journal Entry for Monthly Lease Payment:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Lease Expense | 1,200 | |
| 01-31-2024 | To Bank | 1,200 |
Explanation:
- Lease Expense will debited to recognize the lease cost for the month.
- Bank will credited to reflect the payment.
b. Right-of-Use Asset Amortization (if needed):
While ASC 842 generally doesn’t require the lessee to amortize the right-of-use (ROU) asset for operating leases (as the ROU asset and lease liability are usually equal, resulting in a straight-line lease expense), in cases where there are lease incentives or initial direct costs, amortization entries may be required.
2. Monthly Journal Entries for Finance Lease (Lessee’s Perspective)
In a finance lease, the lessee recognizes both an asset (right-of-use asset) and a liability (lease liability) at the lease commencement. The asset is amortized, and interest is recognized on the lease liability.
Example:
Scenario: A company enters into a 5-year finance lease for machinery starting on January 1, 2024. The machinery’s fair value is $60,000, with an annual lease payment of $13,200, payable monthly at $1,100. The interest rate implicit in the lease is 5%.
a. Initial Recognition (not monthly but included for context):
Journal Entry to Record Lease at Commencement:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Right-of-Use Asset | 60,000 | |
| 01-01-2024 | To Lease Liability | 60,000 |
Explanation:
- Right-of-Use Asset will debited to recognize the asset.
- Lease Liability will credited to recognize the obligation.
b. Monthly Lease Payment (Interest and Principal):
Journal Entry for Monthly Lease Payment (January):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Interest Expense | 250 | |
| 01-31-2024 | Lease Liability | 850 | |
| 01-31-2024 | To Bank | 1,100 |
(Interest Expense: $60,000 x 5% / 12 = $250; Principal: $1,100 – $250 = $850)
Explanation:
- Interest Expense will debited to reflect the cost of borrowing.
- Lease Liability will debited to reduce the obligation.
- Bank will credited to reflect the payment.
c. Monthly Amortization of Right-of-Use Asset:
Journal Entry for Amortization of ROU Asset:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Amortization Expense | 1,000 | |
| 01-31-2024 | To Accumulated Amortization | 1,000 |
(Amortization: $60,000 / 60 months = $1,000)
Explanation:
- Amortization Expense will debited to recognize the expense.
- Accumulated Amortization will credited to reduce the asset’s book value.
3. Monthly Journal Entries for Variable Lease Payments (if applicable)
If the lease includes variable payments that are not based on an index or rate (e.g., based on sales or usage), these are typically recognized in the period in which the event occurs.
Journal Entry for Variable Lease Payment:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Lease Expense | Variable | |
| 01-31-2024 | To Bank | Variable |
Explanation:
- Lease Expense will debited to reflect the cost.
- Bank will credited to reflect the payment.
These entries illustrate how to record the monthly lease payments, interest expenses, and amortization of the right-of-use asset under ASC 842. The exact amounts will depend on the specific terms of the lease.