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The following table summarizes information pertinent to the lease remeasurement.

Remeasured lease term 5 years; 3 years remaining in the
initial term plus 2 years in the
renewal period
Entity W’s incremental borrowing rate on the remeasurement date 10%
CPI available on the remeasurement date 260
Right-of-use asset immediately before the remeasurement 6,99,019 (Refer note 1)
Lease liability immediately before the remeasurement 7,79,016 (Refer note 1)

Procedure to re-measure the lease liability:

To remeasure the lease liability, Jakob Ltd would first calculate the present value of the future lease payments
for the new lease term (using the updated discount rate of 10%).
The following table shows the present value of the future lease payments based on an updated CPI of 260.
Since the initial lease payments were based on a CPI of 250. As a result, Jakob Ltd would increase the future
lease payments by 4%.

Computation of present value of the future lease payments based on an updated CPI of 260:

Year 4 5 6 7 8 Total
Lease Payment 291200 291200 291200 364000 364000 1601600
Discount @ 10% 1 0.909 0.826 0.751 0.683
Present value 291200 264701 240531 273364 248612 1318408

To calculate the adjustment to the lease liability, Jakob Ltd would compare the recalculated and original
lease liability balances on the re-measurement date:
Revised lease liability 13,18,408
Original lease liability 7,79,416
538991

Based on above calculations, it is clear that re-measurement of lease is required and accordingly adjustment to
lease liability and ROU asset is required in the 1st quarter of 2021.

Jakob Ltd would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 538991
To Lease liability 538991
Being lease liability and ROU asset adjusted on account of remeasurement.

Working Notes:
1. Calculation of ROU asset before the date of remeasurement
Year Beginning Lease payment (A) Present value @ 8% Present value of lease
payments (A x B=C)
1 2,80,000 1.000 2,80,000
2 2,80,000 0.926 2,59,280

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