Hello again everyone! Welcome to Part III in the blog series, “My Favorite PeopleSoft Lease Administration Transactions.” In my previous blog, we took an in-depth look at the straight-line accounting entries on a lease with quarterly payments. In Part III, we will examine straight-line accounting entries with a much less conventional payment stream.
Here are the specifics:
Before entering this lease into PeopleSoft, I thought the biggest challenge would be to have PeopleSoft calculate the straight-line entries. However, that worked out very well. The system calculated the correct amounts (down to the penny) despite the unusual payment stream. That is what makes this lease one of my favorite lease transactions in PeopleSoft Lease Administration so far.
The property lease has been structured with the large deferred payments towards the end of the lease and the smaller payments up front. This lease was not structured with the usual, smooth payment stream over the life of the lease that we normally see. Instead, the payment stream strictly reflects a finance decision to defer the payments toward the end of the lease.
Next, for the purposes of this blog, I will only be discussing the straight-line entries. I will not be discussing other lease calculations such as PVLP or ROU balances.
Moving on let’s look at the average monthly lease amount. This came to $537,202.49 which will be the monthly lease expense over the life of the lease. Remember the lease is 168 months long. We are only making payments during 5 of those months. This leaves us with 163 months that do not have a payment. In those months, the lease expense amount will be completely provided by the straight-line accounting entries as shown below.
I have filtered the results from the PeopleSoft straight-line table to display only the 5 months with payments. The straight-line adjustment in column 3 is the difference between column 1 (the payment amount) and column 2 (the straight-line amount).
From the table above and per the process with PeopleSoft, each of these payments will be expensed in the month of payment. Then in order to hit the monthly straight-line amount, PeopleSoft will create an adjusting journal entry as well. For example, here are the journal entries for January 2019. Take special note that the two entries to Lease Expense net to the straight-line amount from the above table: $537,202.49.
Likewise, these would be the journal entries for the first balloon payment in May 2021. The same rule applies here as well. The net amount booked to the Lease Expense account will also be the same straight-line amount: $537,202.49.
Lastly, the table below is a larger extract from the PeopleSoft straight-line table for the first 18 months of the lease. This should provide a better picture of the straight-line journal entries that will be created each month and provide the required data for expense forecasting as well.
In closing, almost every lease that I have encountered so far has a relatively smooth recurring payment schedule. Although this lease was different, it was very good to see PeopleSoft sort out the straight-line entries correctly. If you have any questions at all or would like to have more information on the straight-line process, please let me know.
This now concludes part III of the blog series, “My Favorite PeopleSoft Lease Administration Transactions.” As always, thank you for reading and be sure to read my final installment in this series & our other Lease Administration Blogs.
Steven Brenner, CPA
Senior Principal Consultant