On 1 January 2020, Halwani Construction Company entered into a two-year lease for an excavator. The contract contains an option to extend the lease term for further year. Halwani believes that it is reasonably certain to exercise this option. Excavator has a useful life of ten years Lease payments are $15,000 per year for the initial term and $22,500 per year for the option period. All payments are due at the end of the year. To obtain the lease Halwani incurs initial direct cost of $4,500. The interest rate within the lease is not readily determinable. Halwani's incremental rate of borrowing is 5%. Required: (a) Calculate the lease liability in a proper form. (b) Calculate the initial cost of the right-of-use asset. () Show the journal entries to record the above transactions 2000 the right of use of the asset.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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On 1 January 2020, Halwani Construction Company entered into a two-year lease for an
excavator. The contract contains an option to extend the lease term for further year. Halwani
believes that it is reasonably certain to exercise this option. Excavator has a useful life of ten
years
Lease payments are $15,000 per year for the initial term and $22,500 per year for the option
period. All payments are due at the end of the vear. To obtain the lease Halwani incurs initial
direct cost of $4,500. The interest rate within the lease is not readily determinable. Halwani's
incremental rate of borrowing is 5%.
Required:
(a) Calculate the lease liability in a proper form.
(b) Calculate the initial cost of the right-of-use asset.
(c) Show the journal entries to record the above transactions
(d) Calculate the depreciation for the year 2020 on the right of use of the asset.
Show all calculation.
Transcribed Image Text:Accounting On 1 January 2020, Halwani Construction Company entered into a two-year lease for an excavator. The contract contains an option to extend the lease term for further year. Halwani believes that it is reasonably certain to exercise this option. Excavator has a useful life of ten years Lease payments are $15,000 per year for the initial term and $22,500 per year for the option period. All payments are due at the end of the vear. To obtain the lease Halwani incurs initial direct cost of $4,500. The interest rate within the lease is not readily determinable. Halwani's incremental rate of borrowing is 5%. Required: (a) Calculate the lease liability in a proper form. (b) Calculate the initial cost of the right-of-use asset. (c) Show the journal entries to record the above transactions (d) Calculate the depreciation for the year 2020 on the right of use of the asset. Show all calculation.
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