Question & Answer: PRACTICAL QUESTION (27 marks) Organic Fashion Ltd enters into a 4-year non-cancellable lease agreement starting on 3…..

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 assets 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) AnswerQuestion & Answer: PRACTICAL QUESTION (27 marks) Organic Fashion Ltd enters into a 4-year non-cancellable lease agreement starting on 3..... 1Question & Answer: PRACTICAL QUESTION (27 marks) Organic Fashion Ltd enters into a 4-year non-cancellable lease agreement starting on 3..... 2

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:-

  1. The Lessee has the option to buy the equipment at the end of the lease term.
  2. The lessee have use the equipment almost most of its useful life.
  3. There has been a transfer of right to use.
  4. 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
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