Question

Profit Ltd has entered into an agreement to lease a truck from C ity Ltd.
The terms of the agreement include

Commencement of lease 1 January 2016
Term of lease 4 years
Fair value of the truck $720,000
Annual lease payment, payable in advance $200,048
Purchase option at the end of the lease term $6,000
Implicit interest rate 8%

The expected useful life of the truck to Profit Ltd is five years. To obtain the lease, Profit Ltd paid the initial direct costs of $50,000, of which $15,000 relates to legal fees paid to the lawyer and $35,000 relates to commission paid to the real estate agent. At the end the lease, Profit Ltd has expressed intention to exercise the purchase option at the inception of the lease.

Required (Work to the nearest dollar):

a Explain the accounting treatments of the lease in the books of the lessee in accordance with HKFRS 16.

b Determine the initial measurement of a right-of-use asset (i.e. the truck) and a lease liability in the books of Profit Ltd. (Note: the present value and present value annuity tables are given at the end of this assignment in Tables A and B.)

c Prepare the lease liability movement schedule for each year for Profit Ltd.

d Prepare journal entries in the books of Profit Ltd for the years ended 31 December 2016 and 2017.

e Prepare the extracts of the Statement of Profit or Loss for the year ended 31 December 2017 and the Statement of Financial Position as at 31 December 2017 for Profit Ltd.

Table A Present value interest factor of $1 (PVIFi,n)
Interest rate (i)
Period
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220

Table B Present value interest factor of an ordinary annuity of $1 per period at
i% for n periods (PVIFA i,n)
Interest rate (i)
Period
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502

Answer 1

A	For Lessee, lease will be capital lease because:
	-Lease term is more than 75% of life of asset.
	-PV of annual payment is more than 90% of Fair value of asset.
	-Lesse has option to buy
B
	Year	Annual Payment	Purchase Option	PV 6%	Total
	0	200048		1	2,00,048
	1	200048		0.943396	1,88,725
	2	200048		0.889996	1,78,042
	3	200048		0.839619	1,67,964
	4		6000	0.792094	4,753
	Lease Liability and Lease asset				7,39,531
C	Moment
	Year	Payment	Interest Exp	Principal	Lease Obligation
	0				7,39,531
	0	200048		200048	5,39,483
	1	200048	32,369.00	167679	3,71,804
	2	200048	22,308.26	177740	1,94,065
	3	200048	11,643.87	188404	5,660
	4	6000	339.62	5660	-0
d	Journal For year 16
			Debit	Credit
	01-01-2016	Lease Asset	7,39,531
		Lease Obligation		7,39,531
		(Lease Record)
	01-01-2016	Lease Obligation	200048
		Cash		200048
		(First installment)
	31-Dec-16	Interest Expense	32369
		Interes Payable		184883
	31-Dec-16	Depreciation	184883
		Accumulated Depreciation		184883
		(739531/4)
	Journal For year 17
	01-01-2017	Lease Obligation	167679
		Interest Payable	32369
		Cash		200048
		(Second installment)
	31-Dec-17	Depreciation	184883
		Accumulated Depreciation		184883
		(739531/4)
	31-Dec-17	Interest Expense	22308
		Interes Payable		22308
	31-Dec-17	Depreciation	184883
		Accumulated Depreciation		184883
		(739531/4)