Question

Monterrey Properties enters into a 4-year lease for an automobile to be used in operation. The agreement obligates the company to make lease payments of $10,000 at the end of every year. Its useful economic life would be 8 years. Assume that the company's borrowing rate is 6%. The PV factor for 4 periods, 6%, ordinary annuity is 3.4651.

How much are the lease liability and leasehold assets under IFRS?

What expenses will Monterrey record for the first year of the lease under IFRS?

Answer 1

Year	Lease Payments	Discount factor @ 6 %	P.V. of lease payments
1	10000	0.943396	9434
2	10000	0.889996	8900
3	10000	0.839619	8396
4	10000	0.792094	7921
Total	40000		34651

How much are the lease liability and leasehold assets under IFRS?

The right of use asset equals to the lease liability at the commencement date, plus lessee’s initial direct costs, plus some other things – but in this case, we have nothing like that, so let’s just say it’s the same as the lease liability I.E . $ 34651

Right of Use - Asset Dr. $ 34651

Lease Liability         Cr.                  $ 34651

Year	Lease Liability b/f (a)	Lease Payments (b)	Interest (c) = (a) * 6%	Decrease in lease liablity (d) = (b-c)	Lease Liability c/f (e) = (a-d)
1	34651	10000	2079	7921**	26730
2
3
4

Depreciation = Asset value / No of years = 34651 / 4 years = 8660

What expenses will Monterrey record for the first year of the lease under IFRS?

1) Lease Liability         Dr. 7921**

    Retained earnings / Interest Dr. 2079

  Cash                            Cr.                  10000

2) Retained earnings     Dr. 8660

     Right of Use - Asset Cr.                  8660

( Amortization )