Question

1. How do we record variable payments (not in-substance fixed payments or payments vary by a stated rate or index) in a lease by a lessee and lessor, suppose it is monthly payments?

2. If there is a future event that involves potential loss and it is both probable and reasonably estimable, and you record contingent loss and contingent expense. How do you record journal entry when it becomes actual liability?

Answer 1

1. When the lease consists of variable lease payments, the index or rate at the commencement of the lease must be used to ascertain the lease liability. Any subsequent change from the rate or index included while recording the lease liability is treated as variable lease expense. The lease liability is not remeasured when the index or rate changes except when there is a contract modification.

2. When a contingent liability is estimated , a provision is created against the estimated liability. When the liability materializes, the journal entry is as below:

Accounts	Debit	Credit
Actual expense	XXXX
Provision for the expense a/c		XXXX

The actual expense is debited and charged against the provision created for the liability.