A Lessee enters into a lease of a building with an initial noncancelable term of

Question

A Lessee enters into a lease of a building with an initial noncancelable term of 10 years and an option to extend for an additional five years. At commencement the extension is deemed to not reasonably be certain of exercise. The fixed lease payments are $50,000 per year for the first 10 year and $55,000 during the five year extension period. In connection with the lease, the Lessee will receive a cash payment of $10,000 as an incentive, six months after lease commencement. What are the Lessee's lease term and lease payments used in evaluating the lease accounting under ASC 842?

Explanation / Answer

Lessee's lease term would be 10 years as the additional lease period of 5 years is not reasonably certain as of the date.

The lease payments would be $50,000 per year.

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