Lessee Ltd.- Lease Case

Lessee Ltd. remove Case 1. Was the junior controllers analysis congeal? Why or wherefore not? No, the junior accountants analysis is not correct in classifying the take away as an operate read in unity with IFRS. Whether or not a conduct is classified as a finance or an operating lease depends on if all of the benefits as considerably as risks of ownership have been shifted from the lessor to the lessee.According to IAS 17-10(d), a lease must be classified as a finance if either the lease term is for the study portion of the assets economic life or at the inception of the lease the present value of the minimal payment amounts to at least substantially all of the fair value of the lease asset. With regards to this case, the term of the lease is follow to 75% of the equipments useful life. Also, the present value of the annual payments would equal $263,716 with the fair value of asset only being $265,000, which makes the present value of the minimum lease payment 99. % of the fair value of the leased asset. With these criteria being met it satisfies the requirements of IAS 17 and would in that locationfore be classified as a finance lease 2. Was the senior accountants analysis correct? Why or why not? The senior accountants analysis is correct according to IAS 17. The way the senior accountant lays out his thought process in a step-by-step process creates a nice checklist to compare to the IAS.Beginning with step one, the senior accountant classifies the lease as a finance lease on the harm that the life of the contract encompasses the majority of the equipments useful life. According to IAS 17. 10, the senior accountant is correct. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following IAS 17. 0 * the lease transfers ownership of the asset to the lessee by the end of t he lease term * the lessee has the option to purchase the asset at a worth which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option go away be exercised * the lease term is for the major part of the economic life of the asset, even if title is not transferred * at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset * the lease assets are of a specialized nature such that only the lessee can use them without major modifications being made In his second step, the senior accountant uses the wrong interest rate. He states, Since the lessees additive borrowing rate is greater than the lessors implicit rate in the lease, compute the present value of the minimum lease payments using the 11 share rate. This is wrong because IFRS does not permit the lessee to use the incremental rate if the implicate rate known. He should have used %10 for his calculations. At commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entitys incremental borrowing rate) IAS 17. 20 * PV of the minimum lease payments = $100,0002. 4896 + $20,000 x 0. 7513 = $263,716 Lastly, the senior accountant uses the wrong number from step 2 and therefore is incorrect in determining the amortization tables. Table 1 below shows the corrected table. * Finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability) IAS 17. 25 * The depreciation policy for assets held under finance leases should be consistent with that for owned assets.If there is no reasonable certainty that the lessee will obtain ownership at the end of the lease the asset should be depreciated over the shorter of the lease term or the life of the asset IAS 17. 27 3. How would the answer differ under U. S. GAPP? Under U. S. GAAP many things in the Senior Accountants computations would change. First you would allocate the payments found on the 10 percent implicit rate from the lessor not the 11 percent incremental borrowing rate from the lessee. This would change the total Lease cartel to $263,716. Below is the new table allocating payments between interest and lease obligation. Table 1 Year Cash pmt Interest expense (10%) Reduction in Lease Obligation Balance of Lease Obligation 0 $263,716 $100,000 $26,372 $75,131 $190,088 2 $100,000 $19,009 $80,991 $109,097 3 $100,000 $10,910 $89090 $20,007 The balance is the residual value at the end of the lease ($20,007? $20,000). The journal e ntry to record the lease obligation would have to change based on the correct percentage. Leased Equipment under Capital Lease $263,716 Lease payable$263,716 The correct journal entry to record Year 1 payment would be Rent Expense $2,000 Interest Expense$26,372 Lease payable$73,628 Cash$102,000 there would not be any depreciation recorded on this leased equipment due to the title not transferring or a bargain purchase option.