GASB 87 Lessee Lease Accounting Example

Let’s take as an example a copier lease. The copier costs $8,000 to purchase new; the lessor is willing to lease it to you for 3 years at a price of $250 per month, paid at the beginning of each month, commencing on July 1, 2022. Of that, $41 is identified as the cost of maintenance. If you borrowed money for three years, you would have to pay 4% interest. If you bought the copier, you would normally depreciate it over 5 years. You have no initial direct costs; you also don’t know if the lessor has any initial direct costs.

Gasb87 Lessee Lease example | EZLease

The first month, there would be a right-of-use asset and a liability, a first rental payment, and accrual of interest and depreciation.

Here are the sample finance lease journal entries, first month:

Debit Credit
Initial booking
Right-of-use asset
7,102.59
Current liability
2,289.69
Long-term liability
4,812.90
Monthly rent payment
Current liability
209.00
Non-lease component expense (maintenance)
41.00
Cash finance rent payment
250.00
Interest accrual for first month
Interest expense
22.98
Accrued interest
22.98
Depreciation accrual for first month
Depreciation expense
197.29
Accumulated depreciation
197.29
Liability reclassification, long-term to current
Long-term liability
192.95
Current liability
192.95

Note: The first rental payment, since it is made on the first day of the lease, goes entirely into liability payment. The
GASB 87 standard calls for setting up a different asset and liability, with the rent payment recognized as part of the initial setup of the lease, but the transactions above illustrate more clearly the activity involved. In following months, the interest accrued during the month is paid off by the rental payment, with the excess of rent over accrued interest going to principal (liability) reduction. In certain leases with scheduled rent increases, the rent paid may be less than the accrued interest. This results in an increase to the outstanding liability, known as negative principal amortization.

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Easy testing.

Load this example into EZLease from our bulk import template.

For this copier lease, the journal entries for month two’s rent payment would be:

Debit Credit
Monthly rent payment
Current liability
186.02
Accrued interest
22.98
Non-lease component expense (maintenance)
41.00
Cash
250.00
Interest accrual for second month
Interest expense
22.36
Accrued interest
22.36
Depreciation accrual for second month
Depreciation expense
197.29
Accumulated depreciation
197.29
Liability reclassification, long-term to current
Long-term liability
193.60
Current liability
193.60

Each month, the rent payment is booked in the manner shown above, depreciation and interest are accrued and expensed, and liability is reclassified from long-term to current. When the lease expires (or if it is terminated before its scheduled expiration date), the asset and liability are removed from the books, with a gain or loss recognized if the net asset and remaining liability are unequal. This is almost always the case if the lease is early terminated. 

Under GASB 87, you have to disclose a maturity analysis of your future lease payments separately from other liabilities. 

As of the end of year one, the disclosure would be:

The following is a schedule by years of minimum future payments on non-cancelable finance leases as of June 30, 2023:
Account
Year ending June 30
2024
2,508
2025
2,508
Total lease payments required
5,016
Less amount representing interest
203
Present value of net minimum lease payments
4,813

Note: The table above only discloses payments associated with the lease component.

To enter this lease in EZLease, follow these steps* :

* System settings are 6/30 Year End with a GASB 87 Implementation date of 7/1/2022.

GASB 87 lessee lease accounting example

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