Question

Q10.14 -

As of 1 July 2019, Acer Ltd leases a building from Hill Ltd. The building has a fair value at 1 July 2019 of $1 972 000. The lease agreement details are as follows.

Length of lease	10 Years
Commencement date	1 July 2019
Annual lease payment, payable 30 June each year commencing 30 June 2020	$350,000
Estimated economic life of the building	10 Years
Residual value at the end of the lease term	$20 000
Residual value guarantee by Acer Ltd	$14 000
Interest Rate implicit in the lease	10%

The lease is cancellable, but a penalty equal to 50% of the remaining lease payments is applicable on cancellation. Acer Ltd incurred $1331 to negotiate and execute the lease agreement. All insurance and maintenance costs are paid by Hill Ltd and are expected to amount to $30 000 per year and will be reimbursed by Acer Ltd by being included in the annual lease payment of $350 000. The building is to be depreciated on a straight?line basis.

1. Calculate the initial direct costs incurred by Hill Ltd to negotiate and execute the lease agreement.?

2. Indicate the amounts recorded as right?of?use asset and lease liability by Acer Ltd and the amount recorded as lease receivable by Hill Ltd at the beginning of the lease in their respective books.

3. Prepare the journal entries to account for the lease in the books of Acer Ltd for the year ended 30 June 2020.

4. Calculate the current and non?current lease liability as of 30 June 2020 relating to the lease.

Answer 1

1. initial direct costs is 1331

2.

Right to Use Assets	2,155,996
Lease Obligation	2,155,996
Lease Receivable	2,155,996

Year	Lease Rental	Present value factor	Present value
1	350,000	0.9090909	318,182
2	350,000	0.8264463	289,256
3	350,000	0.7513148	262,960
4	350,000	0.6830135	239,055
5	350,000	0.6209213	217,322
6	350,000	0.5644739	197,566
7	350,000	0.5131581	179,605
8	350,000	0.4665074	163,278
9	350,000	0.4240976	148,434
10	350,000	0.3855433	134,940
10	14,000	0.3855433	5,398
			2,155,996

In the Books of Acer
Date	Account Description	Debit	Credit
1-Jul-19	Right to Use Assets	2,155,996
	Lease Obligation		2,155,996
	(Being Lease Recorded)
30-Jun-19	Lease Obligation	134,400
	Interest expenses	215,600
	Cash		350,000
	(Being Lease Rental paid)
30-Jun-19	Depreciation	214,200
	Accumulated depreciation		214,200
	(Depreciation recorded in Leased assets)

4.

Current Liability	350,000
Non Current Liability	1,671,596
Total Lease Obligation	2,021,596

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