Question

WQ2: (Question 2C) Assume Riddler Ltd (lessee) has entered into a leasing arrangement with Joker Ltd (lessor) for some land. The terms are as follows:

• The lease is for 7 years and commences on the 1 July 2020 The first payment of $85,000 is payable on 1 July 2020.

• There are 6 further payments of $85,000 payable on 1 July each year commencing from 1 July 2021.

? Assume as an incentive to enter in the lease the lessor agrees to pay for signage costs (i.e. costs to prepare and erect Riddlers Ltd signs with company details) of $22,000. These costs were paid by the lessor at the commencement on the lease on 1 July 2020. Assume that Riddler Ltd would expense signage costs when incurred.

• The fair value of the land was $2 million.

• The land is expected to appreciate in value and to have a fair value of $3.5 million at the end of the lease.

• The lessee’s incremental borrowing rate is 7%. • The lessee will vacate the land at the end of the lease. There is no option to purchase the land.

2 Required: (a) Determine the lease term.

(b) Calculate the present value of the lease payments. Show your calculations and basis for these.

(c) Determine the amount of the lease asset and liability initial recognised at the start of the lease. Show your calculations and basis for these.

(d) Prepare a schedule for the lease liability.

(e) Prepare the journal entries required by the lessee for the years ending: 30 June 2021 and 30 June 2022. Show any related calculations.

(f) Calculate the amounts for lease liability shown as non-current (and current) at 30 June 2024.

Answer 1

Ans (a). As mentioned in the problem above the lease term is for a period of 7 years starting from 01.07.2020- 31.07.2027.

Ans (b). Present value of lease payments= $ 85000 X [1+1/1.07+1/(1.07)^2 +1/(1.07)^3 +1/(1.07)^4+1/(1.07)^5 + 1/(1.07)^6] = $ 490135.5.

Ans (c). The lease agreement is for land which will be returned to the lessor at the end of the lease period. As per IAS 17 on lease, a lease agreement on land which has indefinite life is classified as an operating lease. As IAS 17 in case of operating lease lease rentals are charged to Profit & Loss A/c as an expense. No recognition as asset and liability is required.

Ans (d). As per IAS 17 the following should be disclosed in the accounts assuming the accounting year is 01.01.2020-31.12.2120:

Outstanding payments within 1 year=$ 85000

Outstanding payments within 5 years=$ 425000

The same should be modified for each of the years throughout the 7 year lease term.

Ans (e). As per the question the lessor has paid for the signage cost of the lessee amounting to $ 22000. This should be deducted from the lease rentals on a straight line basis over the lease term.

Thus lease rentals= $ 85000- ($ 22000/7) = $ 81857

Date Particulars Dr ($) Cr ($)

30.06.2021 Lease Rent A/c Dr 81857

To Joker Ltd A/c 81857

(Being liability for lease rent recognized)

30.06.2021 Lease Rent A/c Dr 81857

To Joker Ltd A/c 81857

  (Being liability for lease rent recognized)

Ans (f). Since this is an operating lease as per IAS 17 the entire amount of lease rentals should be shown as current liability. As on 30.06.2024

Outstanding lease rentals within 1 year=$ 85000

Outstanding lease rentals within 5 years=$ 255000