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ACCT6001 Intermediate Financial Reporting
Topic 4: Accounting for Leases
Tutorial Questions
Question 1
On 1 January 2018, Smith Ltd entered in to an operating lease arrangement for an item of
equipment. On the same day, Jones Ltd entered into a finance lease arrangement for an identical
item of equipment. Except for their recent equipment lease arrangements, both entities operate in
a similar capacity in one industry and have the same revenue, other expenses, current assets,
other liabilities and issued capital.
Below are Smith Ltd’s and Jones Ltd’s management reports for the year ended 31 December
2018. For management accounting purposes, tax has been ignored.
Management statements of financial performance
Smith Ltd Jones Ltd
31 December 2018 31 December 2018
$ $
Revenue 950,000 950,000
Depreciation – equipment lease Nil (22,540)
Interest expense – equipment lease Nil (45,079)
Operating lease expense – equipment lease (65,000) Nil
Other expenses (795,000) (795,000)
Net income before tax 90,000 87,381
Management statements of financial position
Smith Ltd Jones Ltd
31 December 2018 31 December 2018
$ $
Assets
Current assets 60,000 60,000
Leased assets Nil 450,792
Less accumulated depreciation Nil (22,540)
Other non-current assets 50,000 50,000
Total assets 110,000 538,252
Liabilities
Other liabilities 10,000 10,000
Lease liabilities Nil 430,871
Total liabilities 10,000 440,871
Net assets 100,000 97,381
Equity
Issued capital 10,000 10,000
Retained earnings 90,000 87,381
Total shareholders’ equity 100,000 97,381
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Required:
a) Using this information and the ratio definitions you learnt in ACCT 5001, calculate the
following ratios for Smith Ltd and separately Jones Ltd at 31 December 2018. Show all
workings.
Smith Ltd Jones Ltd
Return on assets
Net income/Total assets
Debt ratio
Total liabilities/Total assets
b) Describe two (2) effects the operating lease and finance lease methods of accounting for
lease arrangements has on the entities’ financial statements. Use the ratios you calculated
in Part a) to support your answer.
Question 2
(Adapted from “IFRS IN PRACTICE – IRFS 16 LEASES”, BDO, p. 20)
Integrated Ltd enters into a 10-year contract with Big Power Ltd to purchase 100% of the energy
produced from one of its power plants known as Bridgetown. The contract states Integrated Ltd can
only use energy produced from the Bridgetown power plant. Big Power Ltd does not have a right to
provide Integrated Ltd with energy from another of its other power plants unless there is
extraordinary situation, such as an emergency that would make the Bridgetown power plant
inoperative.
Under the contract, Integrated Ltd will determine how much energy the Bridgetown power plant will
produce and when to produce it. Big Power Ltd must ensure the Bridgetown power plant can
satisfy these requests. No other customers can purchase energy generated by the Bridgetown
power plant.
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Required:
Use the following template and assess whether, under AASB 16, the contract between Integrated
Ltd and Big Power Ltd contains a lease.
Conditions Para ref Application to this contract
Is the contract for an explicitly
identified asset? Consider B9-B20
whether the supplier has a
substantive right to substitute
the asset.
Does the customer have the B9, B21-
rights to substantially all of the B23
identified asset’s economic
benefits?
Does the customer have the B9, B24
right to direct use of the
identified asset?
Conclusion
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Question 3
P11.6 (a), (b) and (c) “Issues in Financial Accounting” Henderson, Peirson & Others, 16th edition
page 409. A revised part (d) for this question has been included. See below.
Hint: Think about the timing of the payments as it effects the NPV calculation. How would the
calculation change if the payments were made in arrears with the first payment being due on 1
July 2020?
$20 000 1
(a) NPV = 1 − = $60 747
0.12 (1 + 0.12)4
OR using PV tables on p 988: $20 000 x 3.0373 (n = 4, i = 12%) = $60 746 ($1 rounding)
Remember to always include a narration for all journal entries.
Date Details Debit Credit
$ $
1 July 2019
(b) Schedule of lease payments: Lessee
Lease Liability Lease Lease Liability
Interest @ 12%
Period Opening Bal. payment# Closing Bal.
$
$ $ $
30 June 2020
30 June 2021
30 June 2022
30 June 2023
30 June 2024
Footnotes:
# Made on 1 July each year
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(c) Depreciation Schedule: Lessee’s right-of-use asset
Depreciation Accumulated Carrying
Cost
Period charge depreciation Amount
$
$ $ $
30 June 2020
30 June 2021
30 June 2022
30 June 2023
30 June 2024
(d) Prepare all the remaining journal entries for the year ended 30 June 2020.
Date Details Debit Credit
$ $
30 June 2020