Question

On 1 January 2019, Walkinson Ltd entered into a 6-year contract to lease a crane for its freight terminal. When negotiating the lease contract, on 1 January 2019, Walkinson Ltd paid direct costs of $20,000 for technical advice from an engineering consultancy.

The lease contract requires Walkinson Ltd to make 6 annual lease payments of $60,000, commencing on 30 June 2019. The lease contract includes a bargain purchase option, (which Walkinson Ltd is expected to exercise), to purchase the crane for $15,000 at the end of the lease contract.

The crane is expected to have useful life of 8 years, after which it is expected to have $10,000 salvage value.

The implicit interest rate in the lease contract is 11% per annum. The relevant present values are:

Interest Rate	Present Value of $1 in 6 years	Present Value of an annuity of $1 for 6 years
11%	0.5347	4.2305

REQUIRED:

1. Determine the amounts of the lease liability and the right-to-use asset at 1 January 2019 for Walkinson Ltd, in accordance with AASB 16 Leases.

(3 marks)

2. Prepare a schedule of lease payments for Walkinson Ltd for the financial years ending 31 December 2019, 31 December 2020, 31 December 2021, 31 December 2022, 31 December 2023, 31 December 2024 showing lease payments, interest expense, principal reduction, and outstanding lease liability.

(3 marks)

3. Provide the journal entries for Walkinson Ltd relating to the lease contract for the financial year ending 31 December 2019, in accordance with AASB16 Leases.

(4 marks)

Answer 1

a. Lease liability

Fixed payment = 60,000*4.2305 = $253830

Exercise price of purchase option = $15000*.5347 = $8021

Therefore total lease liability = $2,61,851

Right of use asset = Lease liability + initial direct costs

= $2,61,851 + $20,000 = $2,81,851

b.

Year end	Opening liability	Interest expense	Cash payment	Outstanding amount	Interest expense	Closing liability
31-Dec-19	261851	14401.805	-60000	216252.805	11893.90428	228146.7093
31-Dec-20	228147	12548.085	-60000	180695.085	9938.229675	190633.3147
31-Dec-21	190633	10484.815	-60000	141117.815	7761.479825	148879.2948
31-Dec-22	148879	8188.345	-60000	97067.345	5338.703975	102406.049
31-Dec-23	102406	5632.33	-60000	48038.33	2642.10815	50680.43815
31-Dec-24	50680	2787.4	-60000

c. Dr Right of use asset $261851

Cr Lease liability $261851

Dr Right of use asset $8021

Cr Cash $8021

Dr Finance cost $26,295

Cr Lease liability $26295

Dr Lease liability $60,000

Cr Cash $60,000