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

Answer 1

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

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

Right to use asset = Lease liability + initial direct costs

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

2. Lease liability movement schedule

Date	Lease liability (1)	Interest @ 8% (2)	Payment made (3)	Interest Payment (4)	Principal Payment (5=3-4)	Closing lease liability as on date (6=1-3)
1.1.2016	719,981.69	0	200,048		200,048	519,933.69
31.12.2016	519,933.69	41,594.70	0	0	0	561,528.39
1.1.2017	561,528.39	0	200,048	41,594.7	158,453.3	361,480.39
31.12.2017	361,480.39	28,918.43	0	0	0	390,398.82
1.1.2018	390,398.82	0	200,048	28918.43	171,129.57	190,350.82
31.12.2018	190,350.82	15,228.07	0	0	0	205,578.89
1.1.2019	205,578.89	0	200,048	152,28.07	184,819.93	5,530.89
31.12.2019	5,530.89	469.11 (bal fig)	6,000	469.11	5,530.89	0

3. Journal entries

Date	Particulars	Debit	Credit
1.1.2016	Right to use asset Dr	719,981.69
	To lease liability		719,981.69
	(lease liability and lease asset recorded)
1.1.2016	Right to use asset Dr	50,000
	To Cash		50,000
	(Payment of initial direct cost)
1.1.2016	Lease Liability Dr	200,048
	To Cash/ Bank		200,048
	(lease payment made)
31.12.2016	Interest Expense Dr	41,594.7
	To lease liabilty		41,594.7
	(Recording of interest)
31.12.2016	Depreciation Dr	192,495.42
	To right to use asset		192,495.42
	(Depreciation of right to use asset)
1.1.2017	Lease Liabilty Dr	200,048
	To Cash/ Bank		200,048
	(Payment of lease liability)

31.12.2017	Interest Expense Dr	28,918.43
	To cash / bank		28,918.43
	(Recording of interest)
31.12.2017	Depreciation Dr	192,495.42
	To right to use asset		192,495.42
	(Depreciation of right to use asset)

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

31.12.2016	Lease Liability Dr	158,453,3
	Interest Expense Dr	41,594.7
	To cash / bank		200,048
	(Payment of interst and lease liability)
31.12.2016	Depreciation Dr	192,495.42
	To right to use asset		192,495.42
	(Depreciation of right to use asset)