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PRACTICAL QUESTION (27 marks) Organic Fashion Ltd enters into a 4-year non-cancellable lease agreement starting on 30/6/2017. The following are the provisions of the lease agreement: The fair value of the computerized point of sale system is $179,051 at 30 June 2017 The lease term is for 4 years. payments of $48,000 on 30 June 2018, 2019, and 2020. The contract specifies that Organic Fashion Ltd specifies a bargain purchase option of The annual lease payments are made in advance with $48,000 due immediately and annual · $10,000 at the end of the lease term on 30 June 2021. The interest rate implicit in the lease is 8%. · The asset’s residual value at the end of its 4-year effective useful life is nil Note: Round all workings to whole numbers. Discount factors should be displayed with four decimal places. Pro forma schedules for your answers are provided below. i. Can this agreement be considered a lease under AASB 16? (2 marks) Answer
Expert Answer
I.With the following condition we can identify the contact is a lease:-
- The Lessee has the option to buy the equipment at the end of the lease term.
- The lessee have use the equipment almost most of its useful life.
- There has been a transfer of right to use.
- The right to obtain substantially all of the economic benefits from the use of the asset.
Since in the above situation all the condition fulfilled it can be treated as a lease.
IV. Schedule of Lease Payment
| Dates | Opening Liability | Interest@8% | Lease Payment | Change in Liability | PV of Liability at Balance Date |
| 1-Jul-17 | 179,501.00 | – | 48,000.00 | 48,000.00 | 131,501.00 |
| 30-Jun-18 | 131,501.00 | 10,520.08 | 48,000.00 | 37,479.92 | 94,021.08 |
| 30-Jun-19 | 94,021.08 | 7,521.69 | 48,000.00 | 40,478.31 | 53,542.77 |
| 30-Jun-20 | 53,542.77 | 4,283.42 | 48,000.00 | 43,716.58 | 9,826.19 |
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V. Journal Entries for Lease Payment:-
| Date | Accounts Titles And Explanation | Dr Or Cr | Debit ($) | Credit ($) |
| 1-Jul-17 | Lease liability | Dr | 48000 | |
| Cash | Cr | 48000 | ||
| 30-Jun-18 | Lease liability | Dr | 37479.92 | |
| Interest expense | Dr | 10520.08 | ||
| Cash | Cr | 48000 | ||
| 30-Jun-19 | Lease liability | Dr | 40478.314 | |
| Interest expense | Dr | 7521.6864 | ||
| Cash | Cr | 48000 | ||
| 30-Jun-20 | Lease liability | Dr | 43716.579 | |
| Interest expense | Dr | 4283.4213 | ||
| Cash | Cr | 48000 |
