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Question & Answer: PRACTICAL QUESTION (27 marks) Organic Fashion Ltd enters into a 4-year non-cancellable lease agreement starting on 30/6/2017…..

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 30/6/2017..... 1

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

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1. Yes, this lease agreement can be considered a a lease as per AASB 16.

AASB 16 is a single lessee accounting model and requires to recognse all the assets and liabilitiies for all leases of term more than 12 months, unless the underlying value of asset so procured is of very nominal amount. Since, the asset procured is for the lease term more than 12 month and the amount is also not nominal, it can be recognised as a lease agreement as per AASB 16.

2. Schedule of Lease Payyments

Dates
Opening liability
Interest @ 8%
Lease Payments
Change in Liability
PV of liability at the balance date
30-06-2017
           1,79,051.00
0.00
              48,000.00
                   48,000.00
                                              1,31,051.00
30-06-2018
           1,31,051.00
         10,484.08
              48,000.00
                   37,515.92
                                                  93,535.08
30-06-2019
               93,535.08
            7,482.81
              48,000.00
                   40,517.19
                                                  53,017.89
30-06-2020
               53,017.89
            4,241.43
              48,000.00
                   43,758.57
                                                    9,259.32
30-06-2021
                 9,259.32
               740.75
              10,000.00
                     9,259.25
                                                             0.06

3. Accounting Entries in the books will be made like this in the books-

On Taking the aset on lease-

Point of Sales system Dr. $1,79,051

To Lessor A/c $1,79,051

On Downpayment-

Lessor A/c Dr. $48,000

To Bank $48,000

At the end of year (30-06-2018) to recognise the Interest cost-

Interest A/c Dr. 10484.08

To Lessor A/c 10484.08

At the end of Year for recording Depreciation*-

Depreciation A/c Dr. 44,762.75

To Asset A/c 44,762.75

Note*- Depreciation has been calculated on the basis of STraigh Line method (SLM) basis.

Depreciation= (1,79,051- 0)/4

= 44,762.75

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