Question

(A)

Supply Ltd entered into a non-cancellable five-year lease arrangement with Customer Ltd on 1 July 2019. The lease is for an item of machinery. There are to be five annual payments of $315 000, the first being made on 30 June 2020. The implicit interest rate is 12%. 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 Customer Ltd will be able to exercise at the end of the fifth year for $280 000. Customer Ltd determined that this contract contains a lease.

REQUIRED:

Prepare the journal entries in the books of the lessee (Customer Ltd) from 1 July 2019 to 30 June 2020 (the end of the reporting period). Show all working.

(B)

Customer Ltd enters into a 10-year contract with Supplier Ltd for the right to use two specified physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer Ltd makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (i.e., Customer ‘light’ the fibres and decides what data and how much data to transfer). If the fibres are damaged, Supplier Ltd is responsible for the repairs and maintenance. Supplier Ltd owns extra fibres but can substitute those for Customer Ltd’s fibres only for reasons of repairs, maintenance or malfunction.

REQUIRED:

Determine whether the contract contains a lease. Please explain and justify your conclusion according to AASB 16.

Answer 1

(A)

Date	Accounts titles and explanation	Debit	Credit
1 July 2019	Right of use Asset a/c --------------------Dr	1,294,386
	To Lease liability ( from below table)		1,294,386
	(To record the lease)
30 June 2020	Interest expense a/c --------------------Dr	155,326
	Lease liability a/c --------------------Dr	159,674
	To cash		315,000
	(To record lease payment.)
30 June 2020	Amortization Expense a/c ----------------Dr	215,731
	To Right of use Asset		215,731
	(To record amortization expense.) (1294386/6)

Amortization Schedule
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
1 July 2019	-	-	-	1,294,386 ( from below tables)
30 June 2020	315,000	155,326	159,674	1,134,712
30 June 2020	315,000	136,165	178,835	955,878
30 June 2022	315,000	114,705	200,295	755,583
30 June 2023	315,000	90,670	224,330	531,253
30 June 2024	595,000	63,747	531,253	0
Total	1,855,000	560,614	1,294,386

Year	present value factor @12%
1	0.89286
2	0.79719
3	0.71178
4	0.63552
5	0.56743
annuity factor(total)	3.60478

	Amount(1)	present value factor (2)	Present value(1*2)
Lease payment	315,000	3.60478	1,135,506
Bargaining purchase option	280,000	0.56743	158,880
Present value of minimum lease payments			1,294,386

(B)

Here we have to decide if the contract contains a lease. According to the information gave in the inquiry Customer Ltd goes into a 10 year contract with Supplier Ltd for the option to utilize two indicated physically distinct dark fibers within a larger cable connecting Hong Kong to Tokyo. Both the parties go into the contract with indicated terms and conditions. For any fruitful contract, information on all the terms and conditions is essential. According to this case study, Customer Ltd makes the choice about the utilization of the fibers of connecting each finish of the fibers to its electronic equipment. On the off chance that the fibers are damaged, Supplier Ltd is liable for the repairs and maintains. This is one of the most important state of the contract that on the off chance that the fibers are damaged, at that point Supplier Ltd is answerable for the repairs and maintains and both the parties have agreed on the footing and conditions in this regard. According to the case study and information gave in the inquiry we can say that the contract contains a lease because all the terms and conditions are clear for both the parties and supplier Ltd possesses extra fibers, yet can substitute those for customer Ltd's. fibers just for reasons of repairs, maintains or malfunction. So in the mid of the task Supplier Ltd. can substitute those for customer Ltd's. fibers just for reasons of repairs, maintains or malfunction so it very well may be treated as one of the most important state of the contract.

PLease like,,,