(a) In accordance with HKFS 16, it requires lessee to recognize a right-of-use asset and a lease liability for all leases. Therefore, Cherry Ltd should recognize the initial measurement of a right-of-use asset and a lease liability as follows: Discount rate Unpaid lease payment -2nd - 5th payment $800,000 x 3.17 Initial measurement of a lease liability Initial measurement of lease liability Lease payment made at commencement date Initial direct cost – commission Initial direct cost – legal fee Initial measurement of a right-of-use asset (b) The lease liability from 2013 to 2017 are as follows: PV 10% 3.17 2,536,000 2,536,000 2,536,000 800,000 20,000 15,000 3,371,000 Lease liability Year Opening balance Lease Lease liability payment after lease Interest expenses 10% Closing balance 1 Jan (a) (b) payment (c) = (a) - (b) 31 Dec (d) = (c) x 10% |(e) = (c) +(d) 2013 2,536,000 2,536,000 253,600 2,789,600 2014 2,789,600 800,000 1,989,600 198,960 2,188,560 2015 2,188,560 800,000 1,388,560 138,856 1,527,416 2016 1,527,416 800,000 727,416 72,584* 800,000 2017 800,000 800,000 *rounding On 1 January 2013, Cherry Ltd signed a five-year lease agreement for a building which was needed for its business. The lease agreement requires annual payments of $800,000 beginning on 1 January 2013. The fair value of the building would be $3,336,000 and Cherry Ltd estimates that it has a useful life of seven years with no residual value. To obtain the lease, Cherry Ltd incurs commission paid to real estate of $20,000 and lawyer fee of $15,000. At the commencement date, it is concluded that the title of building is not transferred to Cherry Ltd at the end of the lease term. The implicit interest rate in the lease contract is 10%. Required: (a) Determine initial measurement of right-to-use asset (i.e. machine) and lease liability (b) Prepare the table showing the value of lease liability for each year, from 2013 to 2017. (c) Prepare journal entries for the year ended 31 December 2013 for Cherry Ltd. (d) Prepare an extract of statement of profit or loss for the year ended 31 December 2013 and an extract of statement of financial position as at 31 December 2013 in the book of Cherry Ltd.