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T10 Tutorial Solutions

This document contains solutions to accounting questions about lease accounting as a lessee. It includes journal entries to record a right-of-use asset and lease liability at inception, interest expense and depreciation expense each year, and lease payments. It also provides sample note disclosures for the right-of-use asset, maturity analysis of future lease payments, cash flows from leases, and interest expense on lease liabilities. The document calculates the implicit interest rate in a lease and includes an effective interest rate table as a working.

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45 views4 pages

T10 Tutorial Solutions

This document contains solutions to accounting questions about lease accounting as a lessee. It includes journal entries to record a right-of-use asset and lease liability at inception, interest expense and depreciation expense each year, and lease payments. It also provides sample note disclosures for the right-of-use asset, maturity analysis of future lease payments, cash flows from leases, and interest expense on lease liabilities. The document calculates the implicit interest rate in a lease and includes an effective interest rate table as a working.

Uploaded by

Anathi Anathi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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University of Kwa-Zulu Natal

Accounting 211
2022

Tutorial week 10
Tutorial Solution

Leases
Solutions to GAAP : Graded Questions Leases: lessee accounting

Solution 16.14

a) Implicit interest rate

The implicit interest rate in the lease is the discount rate that causes the present value of:
• the lease payments; and
• the unguaranteed residual value
to equal the sum of the
• fair value of the underlying asset; and the
• initial direct costs of the lessor IFRS 16.Appendix A

C
Arrear payments C135 000 per year is
discounted at 12% over C135 000 x 3.6048 486 648
five years
Bargain purchase option C10 000 is discounted at
12% to the end of the five C10 000 x 0.5674 5 674
years
492 322

The discounted value of C492 322 is the same as the fair value of the leased asset at
inception. Therefore, 12% is the implicit interest rate.

b) Journal entries

Debit Credit
01/07/20X0
Right of use asset: cost (A) 492 322
Lease liability (L) 492 322
Recognition of right of use asset and lease liability

30/06/20X1
Lease interest (E) 59 079
Lease liability (L) 59 079
Interest accrued (C492 322 x 12% or W1)
Lease liability (L) 135 000
Bank 135 000
First lease instalment
Depreciation (E) 60 665
Right of use asset: accumulated depreciation (-A) 60 665
Depreciation expense (492 322 –7,000)/ 8*

* If ownership of the underlying asset is transferred to the lessee, or the lessee is reasonably certain to
exercise a purchase option, then the depreciation period runs to the end of the useful life of the underlying
asset. IFRS 16.32

© Service & Kolitz, 2022 -2023 Chapter 16 : Page 23


Solutions to GAAP : Graded Questions Leases: lessee accounting

Solution 16.14 continued...

c) Disclosure

DEVON COACH TOURS LIMITED


EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 30 JUNE 20X2
20X2
C
ASSETS
Non-current assets
Right of use asset (492 322 – 60 665 – 60 665) 370 992

EQUITY AND LIABILITIES


Non-current liabilities
Non-current portion of lease liability (331 369 – 95 236) 236 133
Current liabilities
Current portion of lease liability (135 000 – 39 764) 95 236

d) Lease note

5. Leases

5.1 Right of use asset

Vehicles Total
C C
01/01/X1 Carrying amount 431 657 431 657
Depreciation (492 322 –7,000) / 8 (60 665) (60 665)
30/06/X2 Carrying amount 370 992 370 992

5.2 Maturity analysis of future lease payment

C
20X3 135 000
20X4 135 000
20X5 145 000
415 000

5.3 Cash outflows relating to leases

Cash payments included in statement of cash flows 135 000

5.4 Interest expense on lease liabilities

Interest expense included in finance costs (416 401 x 12% / W1) 49 968

© Service & Kolitz, 2022 -2023 Chapter 16 : Page 24


Solutions to GAAP : Graded Questions Leases: lessee accounting

Solution 16.14 continued . . .

Workings

W1: Effective interest rate table


Date 12% Interest Instalment Liability balance
01/07/20X0 492 322
30/06/20X1 59 079 (135 000) 416 401
30/06/20X2 49 968 (135 000) 331 369
30/06/20X3 39 764 (135 000) 236 133
30/06/20X4 28 336 (135 000) 129 469
30/06/20X5 15 536 (145 000) *(5)
795 000
*rounding

© Service & Kolitz, 2022 -2023 Chapter 16 : Page 25

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