Use the following to answer questions 19-24: (Annuity tables on page 21-30.) in

Question

Use the following to answer questions 19-24: (Annuity tables on page 21-30.) in the Textbook On January 1,2018, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (e) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 1 1% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (0 The yearly rental payment includes $15,000 of executory costs related to taxes on the property

Explanation / Answer

As per IAS 17(Earlier)- Now IFRS 16 : Leases

We need check as to what kind of lease it, so we will have to check for indicators as stated in the international Financial Reporting standard

The main indicator is whether the lessee has the right to use the asset for most of or for all of its useful economic life.

Other indicators that a lease is a finance lease include:

If the condition as stated above is not satisfied it will become a operating lease

Therefore,

24)Considering the above points as discussed, we can conclude Its an operating lease

25) The criteria for recording a lease as finance lease

(A) The lease term is for the major part of the economic life of the asset

Note: As per revised IFRS 16- Leases, only finance lease is considered and accounting is done only as per finance lease concept

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