Question

On January 2016, Profit Ltd enters the contract with City Ltd for the use of a truck. The contract contained the following clauses:

Lease term: four years with a $6,000 purchase option at the end of the lease.

Lease payments: $200,048 per annum in advance, the first payment is made on 1 January 2016.

Fair value of the truck : $720,000

Profit Ltd incurs $50,000 initial direct cost, including $15,000 legal fees and $35,000 commission to real estate agent

At the end of the lease, Profit Ltd has express intention to exercise the purchase option.

Implicit interest rate: 8%

Estimated useful life of the truck is five years

Profit Ltd accounts for its lease using IFRS 16

(a) Determine the lease liability and initial measurement of a right-use-use asset (i.e. the truck) for Profit ltd.

(b) Prepare the lease liability movement schedule for each year for Profit Ltd.

Answer 1

a) Lease liability for Profit ltd. will be equal to sum of present value of all lease payments and present value of purchase option which is calculated as follows:-

Lease Liability = PV of Annual Lease payments+PV of Purchase Option

= [$200,048+($200,048*PVAF(3 yrs, 8%)]+[$6,000*PVF(4 yrs, 8%)]

= [$200,048+($200,048*2.5771)]+($6,000*0.735)

= $200,048+$515,544+$4,410 = $720,002

Therefore the lease liability is $720,002

Right of Use Asset will also include direct cost, legal fees and commission to real estate agent along with lease liability.

Right of use Asset = Direct Cost+Legal Fees+Commission to Real Estate Agent+Lease Liability

= $50,000+$15,000+$35,000+$720,002 = $820,002

b) Lease Liability Movement Schedule for Profit Ltd. (Amounts in $)

Date	Opening Bal (A)	Lease Payment (B)	Interest Payment (C = A*8%)	Decrease in Lease Liability (D = B - C)	Ending Bal (A - D)
01/01/16	720,002	200,048	0 (first lease payment at the beginning)	200,048	519,954
01/01/17	519,954	200,048	41,596	158,452	361,502
01/01/18	361,502	200,048	28,920	171,128	190,374
01/01/19	190,374	200,048	15,230	184,818	5,556
01/01/20	5,556	0	444	0	6,000