Question

Brief Exercise 20-6

Carla Vista 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 $41,336 at the beginning of each year. The equipment has a fair value at the lease’s inception of $119,300, an estimated useful life of 3 years, and no residual value. Carla Vista pays all executory costs directly to third parties. The appropriate interest rate is 4%. . 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.

Answer 1

As per IFRS 16

Right of use asset = lease liability + initial direct cost + prepaid lease payment - lease incentives.

Lease payment = $41,336 at begining of year

Lease term = 3 years

Interest rate =4%

Lease Liability is calculated as below.

As the lease paid in advance first payment will not be shown as lease liability.

Lease Liability = $77,964

Right of use asset = $77,964+$41,336

Right of use asset = $119,300

Repayment schedule lease liability is as below.

Journal entries

Initial recognition

Debit Rigt of Asset $119,300

Credit Lease Liability $77,964

Credit Cash/ Bank $41,336

Being initial recognition of lease liability & lease asset.

At the end of year 1

Debit Lease liability $39,747

Credit cash $39,747

being payment of lease liability

Debit Interest expenses $3,119

Credit Lease liability $3,119.

Being interest expenses recognised.