On January 2016, Profit Ltd enters the contract with City Ltd for the use of a t

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.

(c) Prepare accounting journal entries for Profit Ltd for the years ended 31 December 2016 and 2017

Explanation / Answer

1. Determination of lease liability and initial measurement of leae asset

Right to use asset = Lease liability + initial direct costs

= 719,981.69+50,000= 769,981.69

2. Lease liability movement schedule

3. Journal entries

Depreciation will be charged over lesser of lease term or expected useful life i.e. 4 years

Amount of depreciation = 769,981.69/4= 192495.42

Payment date Amount Discounting factor @8% Discounted Value 1.1.2016 200,048 1 200,048 1.1.2017 200,048 0.9259 185,224.44 1.1.2018 200,048 0.8573 171,501.15 1.1.2019 200,048 0.7938 158,798.10 31.12.2019 6,000 0.7350 4,410 Lease liability to be recognised 719,981.69

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