Solution

ASC 842 Lease Termination: ROU Derecognition and Gain/Loss

When a lessee terminates a lease before the end of its term, ASC 842 requires derecognition of both the right-of-use asset and the remaining lease liability, with the difference recognized as a gain or loss. The blueprint shows the journal entry for an early termination with a settlement payment.

The Blueprint

Worked example — early termination, year 3 of 5

Office lease terminated 24 months before scheduled end. Settlement payment of $48,000 paid on the termination date.

ROU asset, carrying value at termination	$182,400
Lease liability, carrying value at termination	$196,800
Termination settlement (cash paid)	$48,000
Net gain / (loss) on termination	$196,800 − $182,400 − $48,000 = ($33,600) loss
Modification vs termination test	Right of use fully eliminated → termination accounting
Disclosure	ASC 842-20-50-4: gains/losses from lease modifications

JE termination_2026-03-31
  DR  Lease Liability                196,800
  DR  Loss on Lease Termination       33,600
    CR  ROU Asset                    182,400
    CR  Cash                          48,000

If the lessee retains use of any portion of the asset, treat as a modification under ASC 842-10-25-11 instead.

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