Profit Ltd has entered into an agreement to lease a truck from C ity Ltd. The te
ID: 2545000 • Letter: P
Question
Profit Ltd has entered into an agreement to lease a truck from C ity Ltd.
The terms of the agreement include
Commencement of lease 1 January 2016
Term of lease 4 years
Fair value of the truck $720,000
Annual lease payment, payable in advance $200,048
Purchase option at the end of the lease term $6,000
Implicit interest rate 8%
The expected useful life of the truck to Profit Ltd is five years. To obtain the lease, Profit Ltd paid the initial direct costs of $50,000, of which $15,000 relates to legal fees paid to the lawyer and $35,000 relates to commission paid to the real estate agent. At the end the lease, Profit Ltd has expressed intention to exercise the purchase option at the inception of the lease.
Required (Work to the nearest dollar):
a Explain the accounting treatments of the lease in the books of the lessee in accordance with HKFRS 16.
b Determine the initial measurement of a right-of-use asset (i.e. the truck) and a lease liability in the books of Profit Ltd. (Note: the present value and present value annuity tables are given at the end of this assignment in Tables A and B.)
c Prepare the lease liability movement schedule for each year for Profit Ltd.
d Prepare journal entries in the books of Profit Ltd for the years ended 31 December 2016 and 2017.
e Prepare the extracts of the Statement of Profit or Loss for the year ended 31 December 2017 and the Statement of Financial Position as at 31 December 2017 for Profit Ltd.
Table A Present value interest factor of $1 (PVIFi,n)
Interest rate (i)
Period
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220
Table B Present value interest factor of an ordinary annuity of $1 per period at
i% for n periods (PVIFA i,n)
Interest rate (i)
Period
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502
Explanation / Answer
A For Lessee, lease will be capital lease because: -Lease term is more than 75% of life of asset. -PV of annual payment is more than 90% of Fair value of asset. -Lesse has option to buy B Year Annual Payment Purchase Option PV 6% Total 0 200048 1 2,00,048 1 200048 0.943396 1,88,725 2 200048 0.889996 1,78,042 3 200048 0.839619 1,67,964 4 6000 0.792094 4,753 Lease Liability and Lease asset 7,39,531 C Moment Year Payment Interest Exp Principal Lease Obligation 0 7,39,531 0 200048 200048 5,39,483 1 200048 32,369.00 167679 3,71,804 2 200048 22,308.26 177740 1,94,065 3 200048 11,643.87 188404 5,660 4 6000 339.62 5660 -0 d Journal For year 16 Debit Credit 01-01-2016 Lease Asset 7,39,531 Lease Obligation 7,39,531 (Lease Record) 01-01-2016 Lease Obligation 200048 Cash 200048 (First installment) 31-Dec-16 Interest Expense 32369 Interes Payable 184883 31-Dec-16 Depreciation 184883 Accumulated Depreciation 184883 (739531/4) Journal For year 17 01-01-2017 Lease Obligation 167679 Interest Payable 32369 Cash 200048 (Second installment) 31-Dec-17 Depreciation 184883 Accumulated Depreciation 184883 (739531/4) 31-Dec-17 Interest Expense 22308 Interes Payable 22308 31-Dec-17 Depreciation 184883 Accumulated Depreciation 184883 (739531/4)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.