Question

Question four
(I)During the year KCM acquired a new asset with a fair value of K500, 000 under a finance lease. The
lease agreement states that payments of K100, 000 must be paid for six years on 31 December each
year, starting on 31 December 2010. At the end of the six year period legal title of the asset will pass to
KCM.
KCM believes the only accounting entry he must make in relation to this asset is for the K100, 000
payments he has made and he has treated this as an operating expense. The interest rate is 12%
Required.
(a) Using the actuarial method(present value techniques) as recommended by IAS 17 leases
,prepare the calculations and the journal entry for the adjustments required to be made in the
accounts of KCM for the year ended 31 December 2010, to account for this finance lease .
(. b) Explain briefly why ethically KCM cannot treat the lease payment as an operating expense.
(3
Marks)
(ii)Explain the term operating segment as used in IFRS 8 and explain why the users of financial
statement may find a segment report useful.

Answer 1

(a)

Yealy Payment	PV Factor	PV of Instalment paid
	(1+r)^n
1,00,000.00	0.8929	89,290
1,00,000.00	0.797	79,720
1,00,000.00	0.712	71,180
1,00,000.00	0.636	63,550
1,00,000.00	0.567	56,740
1,00,000.00	0.507	50,660
	4.1114	4,11,140
Assest need to be capitalised with $ 411140 (PV of Instalment Paid)
Amortisation Schedule
Year	Opening Balance	Interest @ 12%	Instalment paid	Closing Balance
a	b	c	d	e = (b+c-d)
1	411140	49337	100000	360477
2	360477	43257	100000	303734
3	303734	36448	100000	240182
4	240182	28822	100000	169004
5	169004	20280	100000	89284
6	89284	10716	100000	0
Depreciation working
Year
1	68,523.33
2	68,523.33
3	68,523.33
4	68,523.33
5	68,523.34
6	68,523.34
Total	4,11,138.00

Adjustment of Jounal Entries:

Dr Lease Assets    411140

To Lease Liability 411140

Dr Lease Liability 100000

Cr Lease Charges 100000

Dr Depreciation 68523.33

Cr Acc Dep on Lease assets 68523.33

Dr Interest on Lease assets 49337

Cr Lease Liability

b)

As per IAS 17 Leases - Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Condition that would normally lead to a lease being classified as a finance lease is as per below:

• whether ownership of the asset has been transferred to the lessee by the end of the lease term
• wherher lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable
• whether the lease term is for the major part of the economic life of the asset
• whether at the inception of the lease, the present value of the minimum lease payments amounts covers substantially all of the fair value of the leased asset

If any of the above condition has been fulfilled, Leasse has to account for assets as per finance lease rather than operating lease.

c)

An operating segment is a component of an entity hat engages in business activities from which it may earn revenues and incur expenses whose operating results are reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available.

The objective of segment reporting is to provide information to investors and creditors regarding the financial results and position of the most important operating units of a company, which they can use as the basis for decisions related to the company.

The key advantage of segment reporting is transparency. Analysts, investors and other stakeholders need complete information to evaluate the sustainability and growth of a company and to monitor the performance of its management.

Segment reporting also allows users of financial statement to get a better sense of the fluctuations that might affect overall numbers for each segment. If a business shows much higher earnings than expected, a stakeholder can look at the same report to determine if the numbers are sustainable in future.