of a termination giving you an idea how some of these things work.
the seventh floor of a high rise in Metropolis for 10 years.
Well, in year three the lease is modified to include the eighth floor.
so it could be a new lease.
How do we tell whether it's a new lease or a modification?
that increase is commensurate with the standalone price.
is 10 percent less than the rent for the seventh floor.
Does that mean that it's a modification and not a new lease?
search costs, negotiating cost, credit checks, everything.
and we won't touch the lease of the seventh floor.
we're going to treat them as just simply two separate leases.
Well, what if it's not a new lease?
of the standalone market rent?
I'm going to combine the two and reclassify them together as a single lease.
I'm going to use these revised terms.
even though the seventh floor was rented three years ago.
an option that was not included in the original lease term.
so it was not included in the lease term.
Well, now they've decided to exercise that option.
And the additional obligation they're going to incur is 500,000.
and here's the journal entry.
the present value of the lease payments in the extension period.
adjust the right-of-use asset for those amounts.
increase the right-of-use asset, increase the obligation.
Let's look now at a different type of situation.
Let's look at a partial termination.
The Daily Bugle has had a drop in circulation and they no longer need all of it's space.
So, the landlord agrees to end the lease for half of the space.
become available for use by another tenant.
the 250,000 will be the obligation after the modification.
reduce both the lease obligation and the right-of-use asset.
that's 50 percent of the existing lease obligation prior to the modification.
So we're going to reduce the lease obligation down to 250,000.
and that will be down to 200,000.
And now this is a termination.
So with the termination we can recognize a gain or loss.
In this case we would recognize again on the termination of $50,000.
a modification or a termination of a lease.
We'll move on next to talk about another complex topic in multiple elements.