Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Indluded within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis.
Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Indluded within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
a) Determine the rate of interest implicit in the lease and calculate the present value ofthe lease payments.
b) Prepare the
c) Prepare the portion of the
Transcribed Image Text:Your manager comes to you and states
"What's this new lease standard IFRS 16 about, I hear it will make our performance
metrics much worse?" I also hear that the economic and financial markets effects of the
COVID-19 pandemic may impact a company's lease accounting in several ways.
Your manager requests that you respond by email and you cover the following points.
• A brief critique of the former lease standard IAS-17
• The main issues and changes in the new lease standard IFRS16
A response to your manager on the comment above i.e. the impacts on financial metrics
(ratios) the new standard is likely to create
Àn explanation of three key lease accounting impacts due to the economic and financial
markets effects of the COVID-19 pandemic.
Required:
In a series of bullet points, respond to the manager on the issues raised.
Transcribed Image Text:Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1
July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value
of $647,192.
The machinery is expected to have an economic life of six years, after which time it will have an
expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be
able to exercise at the end of the fifth year for $140,000.
There are to be five annual payments of $175,000, the first being made on 30 June 2021. Induded
within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for
the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-
line basis.
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