Question

Brief Exercise 20-6

Oriole Ltd., a public company following IFRS 16, recently signed a lease for equipment from Costner Ltd. The lease term is 3 years and requires equal rental payments of $44,046 at the beginning of each year. The equipment has a fair value at the lease’s inception of $124,800, an estimated useful life of 3 years, and no residual value. Oriole pays all executory costs directly to third parties. The appropriate interest rate is 6%.

Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.

Using tables, a financial calculator, or Excel functions, calculate the amount of the right-of-use asset and lease liability. Prepare the initial entry to reflect the signing of the lease agreement and the first payment under the lease. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.)

There are THREE (3) lines in the journal entry.

Answer 1

The following are the basic principles applicable for a lessee wrt leases as per IFRS 16

1. Upon lease commencement a lessee recognises a right-of-use asset and a lease liability.

2.The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar.

3.The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate.

in the question its given that the The lease term is 3 years and requires equal rental payments of $44,046 at the beginning of each year. The appropriate interest rate is 6%.

The following table gives the lease liability computation

Year	Amount	Present value factor at 6%	Present Value of amount
1	44046	1	44,046
2	44046	0.9433962	41,553
3	44046	0.8899964	39,201
			124,800

The following are the entires that will be posted

1. as on date of signing lease agreement

Right to use asset Dr 124,800

To lease liability Cr. 124,800

2. for payment of 1st installment

Lease liability Dr 44,046

To Bank Cr 44,046

(no interest cost will come for first installment as the payment is made at the begining of the year)