On January 2016, Profit Ltd enters the contract with City Ltd for the use of a t
ID: 2548445 • Letter: O
Question
On January 2016, Profit Ltd enters the contract with City Ltd for the use of a truck. The contract contained the following clauses:
Lease term: four years with a $6,000 purchase option at the end of the lease.
Lease payments: $200,048 per annum in advance, the first payment is made on 1 January 2016.
Fair value of the truck : $720,000
Profit Ltd incurs $50,000 initial direct cost, including $15,000 legal fees and $35,000 commission to real estate agent
At the end of the lease, Profit Ltd has express intention to exercise the purchase option.
Implicit interest rate: 8%
Estimated useful life of the truck is five years
Profit Ltd accounts for its lease using IFRS 16
(a) Determine the lease liability and initial measurement of a right-use-use asset (i.e. the truck) for Profit ltd.
(b) Prepare the lease liability movement schedule for each year for Profit Ltd.
Explanation / Answer
a) Lease liability for Profit ltd. will be equal to sum of present value of all lease payments and present value of purchase option which is calculated as follows:-
Lease Liability = PV of Annual Lease payments+PV of Purchase Option
= [$200,048+($200,048*PVAF(3 yrs, 8%)]+[$6,000*PVF(4 yrs, 8%)]
= [$200,048+($200,048*2.5771)]+($6,000*0.735)
= $200,048+$515,544+$4,410 = $720,002
Therefore the lease liability is $720,002
Right of Use Asset will also include direct cost, legal fees and commission to real estate agent along with lease liability.
Right of use Asset = Direct Cost+Legal Fees+Commission to Real Estate Agent+Lease Liability
= $50,000+$15,000+$35,000+$720,002 = $820,002
b) Lease Liability Movement Schedule for Profit Ltd. (Amounts in $)
Date Opening Bal (A) Lease Payment (B) Interest Payment (C = A*8%) Decrease in Lease Liability (D = B - C) Ending Bal (A - D) 01/01/16 720,002 200,048 0 (first lease payment at the beginning) 200,048 519,954 01/01/17 519,954 200,048 41,596 158,452 361,502 01/01/18 361,502 200,048 28,920 171,128 190,374 01/01/19 190,374 200,048 15,230 184,818 5,556 01/01/20 5,556 0 444 0 6,000Related Questions
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