Question

PART A

Bushman Ltd enters into a contract with Lessor Ltd for the use of a ship for one year. The ship is to be used to transport wood from central Queensland to the port of Brisbane. Lessor does not have substitution rights.

The contract specifies a maximum distance that the ship can be used. Bushman Ltd is responsible for operating the ship from central Queensland to the port of Brisbane and is able to choose the details of the journeys (including speed, route and rest stops) within the parameters of the contract. Bushman Ltd does not have the right to continue using the trip after the specified duration is complete.

REQUIRED:

Identify whether a lease exists for Bushman Ltd in accordance with the provisions of AASB 16

‘Leases’. Provide any necessary explanations to support your answer.

PART B

On 1 July, 2020 Bushman Ltd entered into a four-year lease of a building from Lessor Ltd. The terms of the lease agreement are as follows.

• Four payments of $200,000 are due starting on 30 June 2021 (after interest has accrued).
• Bushman can elect to terminate the lease at any time, but they need to pay 20% of an annual lease payment for administrative purposes upon termination
• The economic life of the building is estimated to be ten years.
• The fair value of the building at the commencement of the lease is $1,000,000.
• At the end of the lease term, Bushman has the option to purchase the building from Lessor Ltd at a price that is 10% lower than the predicted market value of the building at that time.
• The interest rate implicit in the lease is 5 per cent.

Assume that the contract is a lease for the purposes of AASB 16 ‘Leases’.

REQUIRED:

Explain how Lessor Ltd would classify the lease in accordance with the requirements of AASB

116 ‘Leases’. Show all necessary working, explanations and assumptions to support your

answer. Also prepare the necessary journal entries for the first year in the books of Lessor Ltd (i.e. 1 July 2020 to 30 June 2021).

PART C

REQUIRED:

Assume also that the unguaranteed residual value of the building at the end of the lease term is $100,000. Prepare any necessary journal entries in the books of Bushman Ltd for the period 1 July 2020 to 30 June 2023 to record the lease in accordance with the requirements of AASB 16 ‘Leases’. Show all necessary working, explanations and assumptions to support your answer.

Answer 1