| Course | ACC 620 Financial Reporting II |
|---|---|
| Module | Module 2 |
| Paper type | graduate lease accounting assignment under ASC 842 |
| Length | About 1,060 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | MS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 620 Module 2
Lessee Accounting for the Green Bay Terminal and Tractor Fleet Leases
[Student Name]
Southern New Hampshire University
ACC 620: Financial Reporting II
Module Two Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Lessee Accounting for the Green Bay Terminal and Tractor Fleet Leases
Introduction
In January 2025 the carrier signed two leases as it expanded in northeast Wisconsin. The first is for a new cross-dock terminal in Green Bay, close to two grocery distribution centers it serves. The second covers 40 refrigerated-unit tractors from a captive finance company. This assignment classifies each under ASC 842, measures it at commencement and compares the first-year effects (Financial Accounting Standards Board, 2016).
Key terms of the two leases
| Term | Green Bay terminal | Tractor fleet |
|---|---|---|
| Commencement | January 1, 2025 | January 1, 2025 |
| Lease term | 10 years, no renewal option | 5 years |
| Payments | $480,000 a year, in advance | $1,520,000 a year, in arrears |
| Purchase option | None | $1,000 per tractor at end of term |
| Economic life of asset | 40 years | 7 years |
| Fair value of asset | $9,800,000 | $6,280,000 |
| Discount rate | 6.5 percent incremental borrowing rate | 7 percent rate implicit in the lease |
| Initial direct costs | $25,000 broker fee | None |
Classification
ASC 842-10-25-2 lists five criteria; meeting any one makes a lease a finance lease. For the terminal, title does not transfer, there is no purchase option, the 10-year term is a quarter of the building's 40-year life, the present value of payments, $3.67 million, is about 37 percent of the $9.8 million fair value, and the building could be leased to another carrier or distributor. None is met, so it is an operating lease.
For the tractors, the $1,000 option is nominal against an expected value of about $45,000 per tractor after five years, so the carrier is reasonably certain to exercise it. That meets the second criterion, and the lease is a finance lease. The present value test is also met, since the present value of payments, $6.26 million, is nearly all of the tractors' $6.28 million fair value.
Discount Rates
ASC 842-20-30-3 requires the rate implicit in the lease if readily determinable. The tractor lessor disclosed its implicit rate, 7 percent, in the lease documents, as captive finance companies often do. The terminal landlord did not, and the carrier cannot determine the building's expected residual value, so it uses its incremental borrowing rate, 6.5 percent, which reflects secured 10-year borrowing and is based on a recent quote for a mortgage on a comparable owned terminal.
Initial Measurement
The terminal liability is the present value of 10 annual payments of $480,000 in advance at 6.5 percent, $3,674,930. The right-of-use asset adds the $25,000 broker fee, $3,699,930. The first payment on January 1 reduces the liability to $3,194,930.
The tractor liability is the present value of five payments of $1,520,000 in arrears at 7 percent, $6,232,300, plus the present value of the $40,000 purchase option, $28,519, for a total of $6,260,820. The right-of-use asset equals the liability.
First-Year Accounting
For the operating lease, ASC 842-20-25-6 requires a single lease cost recognized straight-line: $480,000 of payments plus $2,500 of the broker fee each year, $482,500. Interest accretes on the liability at 6.5 percent, $207,670, and the asset absorbs the remainder, a $274,830 reduction. At year end the liability is $3,402,600 before the next payment, and the asset is $3,425,100.
For the finance lease, the carrier records interest of $438,257 and amortization of the right-of-use asset. Because the purchase option is reasonably certain, the asset is amortized over the tractors' seven-year economic life rather than the lease term, $894,403 a year. The first-year expense is $1,332,660, and the liability falls to $5,179,077 after the year-end payment.
First-year comparison
| Item | Terminal, operating | Tractors, finance |
|---|---|---|
| Liability at commencement | $3,674,930 | $6,260,820 |
| Expense in operating income | $482,500 lease cost | $894,403 amortization |
| Interest expense | Included in lease cost | $438,257 |
| Total 2025 expense | $482,500 | $1,332,660 |
| Cash paid | $480,000 | $1,520,000 |
| Liability at December 31 | $3,402,600 | $5,179,077 |
Effects on the Statements
The two leases look different in every statement. The terminal's cost is one line in operating expense and its cash payments are operating outflows. The tractors' amortization sits in operating expense, but the interest sits below operating income, so a finance lease improves operating income and EBITDA compared with an operating lease of the same cash cost. In the cash flow statement, the $1,081,743 principal portion of the tractor payment is a financing outflow and the interest is operating (ASC 842-20-45-5). The finance lease expense is front-loaded: interest falls each year as the liability declines, so total expense will be lower in later years. Kieso et al. (2019) note that this pattern is one reason the FASB kept the operating lease model for leases that are not in substance purchases.
On the balance sheet, operating and finance lease assets and liabilities must be presented separately or disclosed by line item, and the notes must show the weighted-average discount rate and remaining term for each class.
Judgments and Sensitivity
The terminal liability is sensitive to the incremental borrowing rate. At 5.5 percent it would be about $3.82 million, and at 7.5 percent about $3.54 million, a range of roughly $275,000 that changes the reported liability but not the straight-line cost. Because lenders and rating agencies weigh lease obligations when they assess credit (Altamuro et al., 2014), the rate and its basis deserve a clear line in the note. For the tractors, the main judgment is that the purchase option is reasonably certain. If used tractor prices fell sharply, the option would still be worth exercising at $1,000, so the conclusion is robust. A further judgment is the economic life of the tractors; at six years rather than seven, annual amortization would rise to about $1,043,000.
Disclosures
ASC 842-20-50 requires the carrier to disclose, by lease class, the components of lease cost: operating lease cost, finance lease amortization and interest, short-term lease cost for the trailers it rents by the month and variable lease cost, such as the terminal's share of property taxes and maintenance. It must also show cash paid for amounts included in lease liabilities, right-of-use assets obtained in exchange for new lease liabilities, the weighted-average remaining term and discount rate for each class and a maturity analysis reconciling undiscounted payments to the liabilities. For the 2025 additions, the noncash disclosure is significant: $9.96 million of right-of-use assets were obtained without any cash changing hands at commencement.
Conclusion
The carrier's two 2025 leases show the dual model in practice: similar commitments, both on the balance sheet, but with different expense patterns, operating income effects and cash flow classifications. The disclosures should explain the classification of each and the rates used.
References
Altamuro, J., Johnston, R., Pandit, S., & Zhang, H. (2014). Operating leases and credit assessments. Contemporary Accounting Research, 31(2), 551-580. https://doi.org/10.1111/1911-3846.12033
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02). Author.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.
What the ACC 620 Module 2 instructions ask for
The Module Two assignment in ACC 620 usually gives you one or more lease contracts and asks for the lessee's entries and schedules under ASC 842. Plan to determine the lease term, the payments to include and the discount rate, apply the five classification criteria, measure the lease liability and right-of-use asset at commencement and then carry the accounting through the opening year with schedules and entries. Many versions pair an operating lease and a finance lease so the two expense patterns can be seen side by side, and some add initial direct costs, incentives or variable payments. Show the present value computations and explain each judgment, since graders look for the reasoning behind the numbers, especially the discount rate.
How this ACC 620 Module 2 lease accounting assignment example is built
The paper analyzes two leases. The Green Bay terminal lease runs 10 years at $480,000 a year paid in advance, with no transfer of ownership and a present value well below 90 percent of the building's value, so it is an operating lease. Discounted at the carrier's 6.5 percent borrowing rate, the payments are worth $3,674,930, which is the liability, and the right-of-use asset, with $25,000 of initial direct costs, is $3,699,930. The tractor lease covers 40 tractors for five years at $1,520,000 a year in arrears with a purchase option the carrier is reasonably certain to exercise, so it is a finance lease; at the 7 percent implicit rate the liability is $6,260,820. A side-by-side table shows the terminal costing $482,500 in 2025 and the tractors $1,332,660.
Where the ACC 620 Module 2 rubric puts the points
Rubrics for the lease assignment typically score classification, determination of the lease term and payments, choice of discount rate, initial measurement, subsequent measurement schedules, journal entries, statement presentation and Codification support. Top papers apply each classification criterion explicitly, explain why the rate implicit in the lease is or is not readily determinable and show that operating lease cost is straight-line while finance lease cost declines over time. Graders also reward correct cash flow classification and the required disclosures of rates and remaining terms. Common deductions include using old capital lease tests, depreciating an operating lease asset separately from interest, omitting initial direct costs and amortizing a finance lease asset over the wrong period.
ACC 620 Module 2 help: the mistakes that cost points
Lease papers most often slip on the right-of-use asset for operating leases, which is a plug: the single lease cost minus the interest accretion on the liability. Students who compute it as straight-line amortization end up with a lease cost that is not straight-line. A second weak spot is the amortization period for finance leases, which is the asset's useful life when ownership transfers or a purchase option is reasonably certain. If your assignment includes a lessor side, the same classification tests apply with different measurement. Work the present value first and check it against a spreadsheet; a small rate error spreads through every schedule and into the disclosures.
Get ACC 620 Module 2 written to your instructions
Send the ACC 620 Module 2 assignment and the lease terms. The paper will classify each lease, measure the liability and right-of-use asset, build the schedules and journal entries and explain the effects on the statements with Codification support. Your first sample is free and generally arrives in two days. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 620 Module 2 questions, answered
Where can I find a free ACC 620 Module 2 Lease Accounting sample?
This page includes a full ACC 620 Module 2 assignment comparing an operating terminal lease and a finance tractor lease under ASC 842.
What are the five lease classification criteria?
Title passing to the lessee, an option to buy that the lessee will almost surely use, a lease covering most of what remains of the asset's life, payments worth nearly all of its fair value in present value terms, and equipment so tailored that the lessor could not use it elsewhere.
Which discount rate does a lessee use?
The rate implicit in the lease if readily determinable; otherwise the lessee's incremental borrowing rate, with a risk-free rate available as an election for entities that are not public.
How is operating lease cost measured under ASC 842?
As a single lease cost recognized on a straight-line basis over the lease term, with the right-of-use asset amortization calculated as the difference between that cost and the interest on the liability.
How are lease payments classified in the cash flow statement?
Operating lease payments are operating cash flows; finance lease principal payments are financing and the interest portion follows the company's interest classification, usually operating.