Question 1.

On January 1, 20X8, Delta signed an agreement to use a certain asset for six years under a
lease arrangement. The lease requires six equal payments of $2,000 each, with the first
payment due on December 31, 20X8. Additionally, Delta will spend an extra $1,000 on
installation costs. At the end of the six-year period, Delta must return the asset to the owner.
The lease liability at the start of the lease has been computed at $8,710, based on an implicit
interest rate of 10%.
Requirements:
1. Prepare a breakdown of how interest expenses should be allocated over the six-year
lease term.
Date Annual lease Interest Reduction lease Lease
payment 10% liability liability
1/1/x8 8,710
31/12/x8 2,000 871 1,129 7,581
31/12/x9 2,000 758.1 1,241.9 6,339.1
31/12/ 2,000 633.91 1,366.09 4,973.01
x10
31/12/ 2,000 497.30 1,502.70 3,470.31
x11
31/12/ 2,000 347.03 1652.97 1,817.34
x12
31/12/ 2,000 181.73 1,817.34 -
x13
Total 12,000

2. Present the accounting treatment for this lease in Delta’s financial statements as of
December 31, 20X8.
1/1/x8
Dr ROU asset 8,710
Cr Lease liability 8,710

Dr ROU asset 1,000

Cr Cash 1,000

31/12/x8
Dr Lease liability 2,000
Cr Cash 2,000

Dr Interest exp 871

Cr Lease liability 871

Dr Depreciation exp 1,618.33

Cr ROU asset 1,618.33

SoFP at 31/12/20X8
Non – current asset (ROU asset) 8,092.67
Current liability (lease liability) 1,241.9
Non – current liability (lease liability) 6,339.1

SoPL at 31/12/20X8
Expense
Depreciation exp 1,618.33
Interest exp 871

Ǫuestion 2.
On July 1, 20X8, Delta entered into a leasing arrangement for an asset. The agreement
requires five equal yearly payments of $30,000, with the first payment made immediately on
July 1, 20X8. In addition, Delta will spend an extra $10,000 on installation. At the end of
the five-year period, Delta must return the asset to the owner.
At the start of the lease, the liability has been determined as $91,119, which represents the
present value of the remaining four payments, discounted at an implicit annual interest rate
of 12%.
Requirements:
1. Determine the interest expense and depreciation charge that should be recorded in
the income statement for the years ending December 31, 20X8, and December 31,
20X9.

Date Annual lease Interest Reduction lease Lease

payment 12% liability liability
1/7/x8 121,119
1/7/x8 30,000 - 30,000 91,119
1/7/x9 30,000 10,934.28 19,065.72 72,053.28
1/7/x10 30,000 8,646.39 21,353.61 50,699.67
1/7/x11 30,000 6,083.96 23,916.04 26,783.63
1/7/x12 30,000 3,216.37 26,783.63 -
Total

Date Annual depreciation exp Acc. Depreciation CA

1/7/x8
1/7/x8
1/7/x9
1/7/x10
1/7/x11
1/7/x12
Total

2. Identify the portion of the lease liability that should be classified as current and non-
current in Delta’s statement of financial position as of December 31, 20X8.
Ǫuestion 3.
Alpha has entered into an agreement with Omega to lease an aircraft. At the start of the
lease, the aircraft has a fair value of $240,000. Under the lease terms, Alpha must make 10
equal annual payments of $36,000, with each payment made at the end of the year. Alpha is
fully responsible for maintaining the aircraft, which has an estimated useful life of 15 years.
The present value of the total lease payments, discounted using the interest rate implicit in
the lease, has been calculated as $220,000.
Task:
Based on the principles of IFRS 16 Leases, determine the amount by which Alpha’s non-
current assets should increase at the commencement of the lease.
Ǫuestion 4.
Lion Co enters into a five-year lease of a building which has a remaining useful life of ten
years. Lease payments are $50,000 per annum, payable at the beginning of each year. Lion
Co incurs initial direct costs of $20,000 and receives lease incentives of $5,000. There is no
transfer of the asset at the end of the lease and no purchase option.
The interest rate implicit in the lease is not immediately determinable but the lessee’s
incremental borrowing rate is 5%, with the value of $1 having a cumulative present value in
four years' time of $3.546. The value of $1 has a cumulative present value in five years' time
of $4.329.
At the commencement date Lion Co pays the initial $50,000, incurs the direct costs and
receives the lease incentives.
(1) Calculate the lease liability
(2) Calculate the value of the Right-of-use asset. Record the transaction in the financial
statements.
(3) Show the impacts on financial statements at the end of year 1.
Ǫuestion 5.
From the same information in question 4, applying the case of payment in arrears.
Ǫuestion 6.
Aqua Co makes up its accounts to 31 December each year.
It enters into a lease (as a lessee) to lease an item of equipment with the following terms:
Commencement of lease: 1 January 20X1
Term: Five years: $2,000 paid at commencement of lease, followed by four payments of
$2,000 payable at the start of each subsequent year
Fair value: $8,000
Present value of future lease payments: $6,075
Useful life: Eight years
Interest rate implicit in the lease: 12%
Required: Show how should this lease should be accounted for in Aqua Co's statement of
financial position as at 31 December 20X1.
Ǫuestion 7.
Capital Co entered into a sale and leaseback on 1 April 20X7. It sold a lathe with a carrying
amount of $300,00 for $400,000 (equivalent to fair value) and leased it back over a five-year
period, equivalent to its remaining useful life.
The transaction constitutes a sale in accordance with IFRS 15. The lease provided for five
annual payments in arrears of $90,000. The rate of interest implicit in the lease is 5%. The
cumulative value of $1 in five years' time is $4.329
Required
What are the amounts to be recognised in the financial statements at 31 March 20X8 in
respect of this transaction?