What exemptions are available that would allow a lessee not to capitalise lease assets and lease liabilities?
Question Two (R.Q. 11.24)
On 1 July 2023, Diversify Ltd signs a non-cancellable agreement to lease a building from Fortified Ltd. The lease agreement requires seven annual payments of $350 000, with the first payment being made on 30 June 2024. Within each of these payments, $30 000 represents a payment to Fortified Ltd for rates and maintenance of the property. The building is expected to have a life of only nine years, after which time it will have no salvage value. At 1 July 2023 the land and building have a fair value of $492 400 and $1 148 936 respectively. The land and building are expected to have a value (unguaranteed by the lessee) of $400 000 at the end of year 7, with the land component expected to be worth $120 000 and the building component expected to be worth $280 000. The rate of interest implicit in the lease is 12 per cent.
Required
(a) Prove that the rate of interest implicit in the lease is 12 per cent.
(b) Provide the journal entries for the years ending 30 June 2024 and 30 June 2025 for Diversify Ltd.
(c) Provide the journal entries for the years ending 30 June 2024 and 30 June 2025 for Fortified Ltd.
Question Three (R.Q. 11.30)
On 1 July 2023, Birdy Ltd decides to lease an aeroplane from Aeronautical Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 12 per cent. It is expected that the aeroplane will be scrapped at the end of the lease term. The fair value of the aeroplane at the commencement of the lease is $2 366 738. The lease is non-cancellable, returns the aeroplane to Aeronautical Ltd at the end of the lease, and requires a lease payment of $350 000 on inception of the lease (on 1 July 2023) and lease payments of $270 000 on 30 June each year (starting 30 June 2024). There is no residual payment required.
Required
(a) Provide the journal entries for the lease in the books of Birdy Ltd as at 1 July 2023 and 30 June 2024.
(b) Provide the journal entries for the lease in the books of Aeronautical Ltd as at 1 July 2023 and 30 June 2024
(c) Provide the journal entries in the books of Birdy Ltd for the final year of the lease (that is, the entries in 20 years’ time).
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(d) Provide the journal entries in the books of Aeronautical Ltd for the final year of the lease (that is, the entries in 20 years’ time).
Reference:
Deegan, C., 2020 (9th Edition). Financial accounting. Mcgraw-hill education (Australia) Pty Ltd.
