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 · $10,000 at the end of the lease term on 30 June 2021. The interest rate implicit in the lease is 8%. · The asset’s residual value at the end of its 4-year effective useful life is nil Note: Round all workings to whole numbers. Discount factors should be displayed with four decimal places. Pro forma schedules for your answers are provided below. i. Can this agreement be considered a lease under AASB 16? (2 marks) Answer
I.With the following condition we can identify the contact is a lease:-
- The Lessee has the option to buy the equipment at the end of the lease term.
- The lessee have use the equipment almost most of its useful life.
- There has been a transfer of right to use.
- The right to obtain substantially all of the economic benefits from the use of the asset.
Since in the above situation all the condition fulfilled it can be treated as a lease.
IV. Schedule of Lease Payment
|Dates||Opening Liability||Interest@8%||Lease Payment||Change in Liability||PV of Liability at Balance Date|
V. Journal Entries for Lease Payment:-
|Date||Accounts Titles And Explanation||Dr Or Cr||Debit ($)||Credit ($)|