Question

Sandy Ltd enters into a non-cancellable five-year lease agreement with Bill Ltd on 1 July 2019. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1 294 384. The cost of the machinery to Bill Ltd is $1200 000.

The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210 000. There is a bargain purchase option that Sandy Ltd will be able to exercise at the end of the fifth year for $280 000.

There are to be five annual payments of $350 000, the first being made on 30 June 2020. Included within the $350 000 lease payments is an amount of $35 000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The interest rate implicit in the lease is 12 per cent.

Additional Information:
–             Present value of an annuity in arrears of $1 for five years at 12 per cent = 3.6048
–             Present value of $1 in five years at 12 per cent = 0.5674
Round all calculations to the nearest dollar and show All workings and calculations.

Required
A) Prepare the journal entries to account for the lease transaction in the books of Sandy Ltd at 1 July 2019 and 30 June 2020.

B) Show what would be reported in the Statement of Financial Position for Sandy Ltd for the year ended 30 June 2021 in regards to the lease.

C) AASB 16 Leases came into effect on 1 January 2019. It replaces the old Standard AASB 117 Leases. Explain the differences between AASB 117 and AASB 16, and the benefits of the new Standard. (Explain in your own words)

Answer 1

Question 1

Journal entries in the books of Sandy Ltd

Date	Particulars	Debit	Credit	Remarks on entries
01-Jul-19	Right-to-use asset A/c                    Dr	12,94,384		Fair value of lease is given in question but the same is caculated and given in Note 1
	To Lease Liability		12,94,384
	(Recognition of Lease at inception)
				Interest is charged on lease liability as per standards. Calculation is given in Note 2
30-Jun-20	Interest on Lease A/c                      Dr	1,55,326
	To Lease Liability		1,55,326
	(Interest on lease accounted)
				Lease payment of 350000 and 35000 are split as 35000 is given for insurance and maintenance which are non lease components. Hence they are not included in lease calculations. This will be recognised as expenses each year of payment.
30-Jun-20	Lease Liability A/c                             Dr	3,15,000
	Insurance & Maintenance on Lease Dr	35,000
	To Bank A/c		3,50,000
	(Being Lease payments paid)
				Depreciation is charged on Right-to-use asset as depreciation amount of asset which means 1294384-210000 because this is the residual value of asset and then depreciation in straightline method in six years. Calculation are given in Note 3
30-Jun-20	Depreciation on right to use asset A/c Dr	2,16,877
	To Accumulated Depreciation on right to use asset A/c		2,16,877
	(Being depreciation for the year on right to use assets)

Note 1

Date	Payments	Present value factor	Present value
30-Jun-20	315000	0.892857143	281250
30-Jun-21	315000	0.797193878	251116.0714
30-Jun-22	315000	0.711780248	224210.7781
30-Jun-23	315000	0.635518078	200188.1947
30-Jun-24	315000	0.567426856	178739.4596
30-Jun-24	280000	0.567426856	158879.5196
			1294384.023

Note 2

Statement showing lease liability over the years
Date	Opening balance	Interest	Payments	Closing balance
30-Jun-20	12,94,384	1,55,326	-3,15,000	11,34,710
30-Jun-21	11,34,710	1,36,165	-3,15,000	9,55,875
30-Jun-22	9,55,875	1,14,705	-3,15,000	7,55,580
30-Jun-23	7,55,580	90,670	-3,15,000	5,31,250
30-Jun-24	5,31,250	63,750	-5,95,000	-

Note 3

Statement showin depreciation of assets
Date	Opening balance	Depreciation	Closing balance
30-Jun-20	10,84,384	2,16,877	8,67,507
30-Jun-21	8,67,507	2,16,877	6,50,630
30-Jun-22	6,50,630	2,16,877	4,33,754
30-Jun-23	4,33,754	2,16,877	2,16,877
30-Jun-24	2,16,877	2,16,877	-

Question 2

Extract of Statement of financial position as on 30 June 2021
Assets
Non-Current Assets
Property, Plant and Equipments	1294384
Accumulated depreciation	-433754
Net Balance		860630.4
Liabilities
Non Current Liability
Lease Liability*		640875.3
Current Liability
Lease Liability		315000

*Non-Current portion is obtained as 955875 - 315000 (As per note 2 closing balance on 30 June 2021)

Question 3

AASB 16 is introduced in January 2019, earlier to which AASB 117 was used for recognition of leases.

AASB 117 was having two concepts for lease from lessee's perspective

Operating lease - Lease payments were recognised as expenses in the years of lease

Finance Lease - In this type the recognition of lease was similar to the AASB 16

AASB 16 now require all the leases should be recognise in balance sheet as right to use asset and lease liability and it does not allow operating lease concept only with the exeption of Low value lease and short time leases for 12 months or lower.

Therefore, Lease accounting for lessee is majorly changed by AASB 16.