Question

Ballan Ltd entered into a non-cancellable lease agreement with Manufacturer Ltd to lease construction equipment from Manufacturer Ltd under the following terms:

Lease term 9 years

Useful life of leased asset 11 years

Expected residual value at end of lease $6,000

Lease payment at inception (beginning) $7,000

Lease payments (at end of each year) $5,000 per annum (9 payments)

Implicit interest rate for lease 11%

Fair Value of Equipment $37,031

Present Value of minimum lease payments $34,685

Ballan does not intend to acquire the asset at the end of the lease term. What is the journal entry to record the first lease payment at the inception of the lease (rounded to the nearest dollar) in accordance with the requirements of AASB 16 Leases?

Answer 1

	Lessee Accounting: Balla Ltd
	The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest(i.e., 11% p.a. in this case) or incremental borrowing rate(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject depreciation on the straight-line basis over the lease term of 9 year.
	The Right in Use asset is recognised at :    Lease liability i.e.Present value of Lease payment less any incentive received and expected residual value(guaranteed) . Initial direct cost be added..
	The leasee shall record the lease liability & right in use asset at the Present value of Lease payment & (expected residual value will not come as the same is not guaranteed ) in the given case.
	Year	Payments (Cash flows)	Present Value Factor @11%p.a.	Discounted Cash flows/ Present value
	1	$                                                       5,000.00	0.90090	$                                  4,505
	2	$                                                       5,000.00	0.81162	$                                  4,058
	3	$                                                       5,000.00	0.73119	$                                  3,656
	4	$                                                       5,000.00	0.65873	$                                  3,294
	5	$                                                       5,000.00	0.59345	$                                  2,967
	6	$                                                       5,000.00	0.53464	$                                  2,673
	7	$                                                       5,000.00	0.48166	$                                  2,408
	8	$                                                       5,000.00	0.43393	$                                  2,170
	9	$                                                       5,000.00	0.39092	$                                  1,955
	Total	$                                                          45,000		27,685
	Right of use asset will be recognised at
		Initial Lease liability	$                     27,685
		Add: Initial Lease payment	$                       7,000
		ROU Asset	$                     34,685
		In the books of Leasee
		Journal Entries
	Year	Accounts & explaination	Debit	Credit
	Initial payment	Right of Use Asset	$                     34,685
		Lease liabilty		$                               27,685
		Cash		$                                  7,000
		(To record initially recognise the lease-related asset and liability .)
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