AC2101

Question 2
Group 3
A CAPITALISED LEASED ASSET IS ALWAYS
DEPRECIATED OVER THE TERM OF THE
LEASE BY THE LESSEE.

True or False?
A CAPITALISED LEASED ASSET IS ALWAYS
DEPRECIATED OVER THE TERM OF THE
LEASE BY THE LESSEE.

FALSE
SFRS(I) 16:32
If the lease transfers ownership of the underlying asset to the lessee
by the end of the lease term or if the cost of the right-of-use asset
reflects that the lessee will exercise a purchase option, the lessee
shall depreciate the right-of-use asset from the commencement
date to the end of the useful life of the underlying asset.

Otherwise, the lessee shall depreciate the right- of-use asset from
the commencement date to the earlier of the end of the useful life
of the right-of-use asset or the end of the lease term.
IN CONCLUSION

A right-of-use asset would not always be depreciated over the lease

term by the lessee,

When it is not reasonably certain that the ownership of the lease

would be transferred to the lessee, the asset would be depreciated
from the commencement date to the earlier of the end of the useful
life of the right-of-use asset or the end of the lease term.
IN COMPUTING THE ANNUAL LEASE
PAYMENTS, THE LESSOR DEDUCTS ONLY
A GUARANTEED RESIDUAL VALUE FROM
THE FAIR VALUE OF A LEASED ASSET IN
ALL CIRCUMSTANCES.

True or False?
IN COMPUTING THE ANNUAL LEASE
PAYMENTS, THE LESSOR DEDUCTS ONLY
A GUARANTEED RESIDUAL VALUE FROM
THE FAIR VALUE OF A LEASED ASSET IN
ALL CIRCUMSTANCES.

FALSE
SFRS(I) 16:70
At the commencement date, the lease payments included in the
measurement of the net investment in the lease comprise the following
payments for the right to use the underlying asset during the lease term
that are not received at the commencement date:

(a) fixed payments, less any lease incentives payable;

(b) variable lease payments that depend on an index or a rate,
(c) any residual value guarantees provided to the lessor by the lessee;
(d) the exercise price of a purchase option if the lessee is reasonably
certain to exercise that option and
(e) payments of penalties for terminating the lease, if the lease term
reflects the lessee exercising an option to terminate the lease.
IN CONCLUSION

When computing the annual lease payments, the lessor deducts the
present value of estimated recovery value of the asset at the end of
the lease term from the fair value of the asset.

The estimated recovery value can consist of guaranteed and

unguaranteed residual value, exercise price of a purchase option
and/or termination option payment and residual value.
IF IT IS PROBABLE THAT THE EXPECTED
RESIDUAL VALUE IS LESS THAN THE
GUARANTEED RESIDUAL VALUE, THE
DIFFERENCE SHOULD BE INCLUDED IN THE
COMPUTATION OF THE LEASE LIABILITY.

True or False?
IF IT IS PROBABLE THAT THE EXPECTED
RESIDUAL VALUE IS LESS THAN THE
GUARANTEED RESIDUAL VALUE, THE
DIFFERENCE SHOULD BE INCLUDED IN THE
COMPUTATION OF THE LEASE LIABILITY.

TRUE
If expected residual value (ERV) is less than the guaranteed
residual value (GRV), there would be an amount expected to be
payable - the expected payment under guaranteed residual
value (EPGRV).

The EPGRV would be added to lease payments. Lease liability is

then computed by the present value of lease payments.
 Under SFRS(I) 16, the lessee records a right-of-use asset that could
comprise of several components. Which one of the components below is
not capitalized into the right-of-use asset?

PV of dismantlement & Initial direct costs

PV of outstanding LPs
restoration costs incurred by lessee

Unguaranteed residual Prepaid lease

value payments

Part II
PV of outstanding LPs

Prepaid lease
payments

Initial direct costs

incurred by lessee

PV of dismantlement &
restoration costs

Part II
 Unguaranteed residual
value

More applicable in the lessor’s perspective in calculating the Gross

Investment (Lease Receivable).

Gross Investment Lease payments + unGRV

Part II
On 1 January 20x1, Acorn entered into a lease contract with Beech to lease a car for 3 years.
Acorn will pay Beech an annual lease payment of $13,418, with the first payment on the
commencement of the lease and subsequent payments at the beginning of each year thereafter.
In addition, Acorn and Beech agree on a residual value guarantee of $50,000 although the
expected fair value at the end of the lease term is $48,000. Beech requires a 6% return on the
lease and this rate is known to Acorn.

Based on Acorn and Beech’s stated accounting policy on depreciation, cars have an estimated
useful life of 8 years with nil residual value, and are depreciated on a straight-line basis.

Acorn and Beech adopts SFRS(I) 16 Leases in accounting for this lease. Both companies have a
31 December financial year end.

(a) Assume that the fair value of the car at the end of the lease term is $48,000, prepare the necessary
journal entries on the above transaction by Beech. Beech accounts for the lease as a finance lease.

Part III
In calculating the Lease Payments, is
$48,000 or $50,000 taken into account?
a. $48,000
b. $50,000
In calculating the Lease Payments, is
$48,000 or $50,000 taken into account?
a. $48,000
b. $50,000
On 1 January 20x1, Acorn entered into a lease contract with Beech to lease a car for 3 years.
Acorn will pay Beech an annual lease payment of $13,418, with the first payment on the
commencement of the lease and subsequent payments at the beginning of each year thereafter.
In addition, Acorn and Beech agree on a residual value guarantee of $50,000 although the
expected fair value at the end of the lease term is $48,000. Beech requires a 6% return on the
lease and this rate is known to Acorn.

Based on Acorn and Beech’s stated accounting policy on depreciation, cars have an estimated
useful life of 8 years with nil residual value, and are depreciated on a straight-line basis.

Acorn and Beech adopts SFRS(I) 16 Leases in accounting for this lease. Both companies have a
31 December financial year end.

Part III
On 1 January 20x1, Acorn entered into a lease contract with Beech to lease a car for 3 years.
Acorn will pay Beech an annual lease payment of $13,418, with the first payment on the
commencement of the lease and subsequent payments at the beginning of each year thereafter.
In addition, Acorn and Beech agree on a residual value guarantee of $50,000 although the
expected fair value at the end of the lease term is $48,000. Beech requires a 6% return on the
lease and this rate is known to Acorn.

BGN n=3
Based on Acorn and Beech’s stated accounting policy on depreciation, cars have an estimated
ALP= 13,418
useful life of 8 years with nil residual value,
GRV=and are depreciated on a straight-line basis.
50,000
Expected RV= 48,000
Acorn and Beech adopts SFRS(I) 16 Leases in i/r= 6%
accounting for this lease. Both companies have a
31 December financial year end.

Part III
(a) Assume that the fair value of the car at the end of the lease term is $48,000, prepare the
necessary journal entries on the above transaction by Beech. Beech accounts for the lease as a
finance lease. LESSOR
Lease Payments = (ALP x No. Of periods) + GRV
= (13,418 x 3) + 50,000
= $90,254 BGN

Gross Investment (GI) = Lease Payment + unGRV Using financial calculator,

= 90,254 + 0 n=3 i/r=6% PMT=13,418
= $90,254 FV=50,000
PV=80,000 (nearest whole no.)
Net Investment (NI) = PV of Gross Investment
= $80,000

Interest to be amortised = GI - NI
= 90,254 - 80,000
= $10,254

Part III
AMORTIZATION SCHEDULE
Year Lease Payment Interest Principal Net Investment
Received Balance
Before the start $80,000

1 Jan 20x1 $13,418 - $13,418 $66,582

1 Jan 20x2 $13,418 $3994 $9424 $57,158

1 Jan 20x3 $13,418 $3430 $9988 $47,171

31 Dec 20x3 0 $2830 ($2830) $50,000

31 Dec 20x3 $50,000 0 $50,000 0

Journal Entries ($) ($) ($) ($)
1/1/x1 1/1/x3
Dr Lease Receivable 90,254 Dr Cash 13,418
Cr Asset (Car) 80,000 Cr Lease Receivable 13,418
Cr Unearned Interest Income 10,254
31/12/x3
Dr Cash 13,418 Dr Unearned Interest 2,830
Cr Lease Receivable 13,418 Income 2,830
Cr Interest Income
31/12/x1
Dr Unearned Interest Income 3,994 Dr Asset (Car) 48,000
Cr Interest Income 3994 Dr Cash 2,000
Cr Lease Receivable 50,000
1/1/x2
Dr Cash 13,418
Cr Lease Receivable 13,418

31/12/x2
Dr Unearned Interest Income 3,430
Cr Interest Income 3,430
(b) State very briefly why Beech was correct in classifying the above lease as a finance lease.

According to SFRS(I) 16 Para 61, a lessor shall classify its lease as a finance leases if the
transfer of risks and rewards is incidental to ownership of the underlying asset.

SFRS(I) 16 Para 63

2. Lessee has purchase

1. Lessee obtains asset at
the end of the lease
3. Lease term is a major
option at a price that is
part of economic life of
expected to be sufficiently
underlying asset
lower than FV

4. PV of the lease
5. Underlying asset is of
payments amounts to at
such a specialised nature,
least substantially all of the
only lessee can use it
underlying asset’s FV

Part III
(b) State very briefly why Beech was correct in classifying the above lease as a finance lease.

According to SFRS(I) 16 Para 61, a lessor shall classify its lease as a finance leases if the
transfer of risks and rewards is incidental to ownership of the underlying asset.

SFRS(I) 16 Para 63

8. Lessee has the ability to

6. Lessor’s losses borne by 7. Gains or losses from continue the lease for a
lessee upon lessee’s fluctuation of residual FV secondary period at a rent
cancellation of lease accrues to lessee that is substantially lower
than market rate

Part III
(b) State very briefly why Beech was correct in classifying the above lease as a finance lease.

According to SFRS(I) 16 Para 61, a lessor shall classify its lease as a finance leases if the
transfer of risks and rewards is incidental to ownership of the underlying asset.

SFRS(I) 16 Para 63

2. Lessee has purchase

1. Lessee obtains asset at
the end of the lease
3. Lease term is a major
option at a price that is
part of economic life of
expected to be sufficiently
underlying asset
lower than FV

4. PV of the lease
5. Underlying asset is of
payments amounts to at
such a specialised nature,
least substantially all of the
only lessee can use it
underlying asset’s FV

Part III
(b) State very briefly why Beech was correct in classifying the above lease as a finance lease.

According to SFRS(I) 16 Para 61, a lessor shall classify its lease as a finance leases if the
transfer of risks and rewards is incidental to ownership of the underlying asset.

SFRS(I) 16 Appendix A

PV of lease payments + UNGRV = FV of underlying asset + initial direct cost

Since UNGRV = 0 and initial direct cost =0,

PV of lease payments = FV of underlying asset

It amounts to substantially all of the underlying asset’s Fair value

Part III
(c) Assume that the fair value of the car at the end of the lease term is $48,000, prepare the
necessary journal entries on the above transaction by Acorn.
LESSEE

Lease Payments (LP) = (ALP x No. Of periods) + Expected payment under GRV (EPGRV)
= (13,418 x 3) + 2,000
= $42,254 BGN

Using financial calculator,

Lease Liability = PV(LP) n=3 i/r=6% PMT=13,418
= $39,698 FV=2,000
PV=39,698 (nearest whole no.)

Interest to be amortised = Lease Payments - Lease Liability

= 42,254 - 39,698
= $2,556

Part III
AMORTIZATION SCHEDULE
Year Lease Payment Interest Principal Lease Payable

Before the start $39,698

1 Jan 20x1 $13,418 - $13,418 $26,280

1 Jan 20x2 $13,418 $1,577 $11,841 $14,439

1 Jan 20x3 $13,418 $866 $12,552 $1,887

31 Dec 20x4 0 $113 ($113) $2,000

31 Dec 20x4 $2,000 0 $2,000 0

Journal Entries ($) ($) ($) ($)
1/1/x1 31/12/x2
Dr ROU Asset (Car) 39,698 Dr Interest Expense 866
Cr Lease Payable 39,698 Cr Interest Payable 866

Dr Lease Payable 13,418 Dr Depreciation 13,233

Cr Cash 13,418 Cr Accumulated 13,233
Depreciation
31/12/x1
Dr Interest Expense 1,577
Cr Interest Payable 1,577 Depreciation period is taken to be from the
commencement date to the earlier of the
Dr Depreciation 13,233 end of the useful life of the ROU asset or
13,233 the end of lease term.
Cr Accumulated Depreciation
SFRS(I) 16 Para 32 it is not certain that the
1/1/x2 lease transfers ownership of the underlying
Dr Lease Payable 11,841 asset to the lessee by the end of the lease
Dr Interest Payable 1,577 term.
Cr Cash 13,418
Journal Entries
($) ($)
1/1/x3
Dr Lease Payable 12,552
Dr Interest Payable 866
Cr Cash 13,418

31/12/x3
Dr Interest Expense 113
Cr Interest Payable 113

Dr Depreciation 13,233
Cr Accumulated Depreciation 13,233

Dr Lease Payable 2,000

Cr Cash 2,000
DR Accumulated Depreciation 39,698
CR ROU Asset 39,6
98
(Adapted from KWW)

Kobayashi Group manufactures a check-in kiosk with an estimated economic life of 12 years and
leases it to Japan Airlines (JAL) (JPN) for a period of 10 years. The normal selling price of the
equipment is ¥299,140, and its unguaranteed residual value at the end of the lease term is
estimated to be ¥20,000. JAL will pay annual payments of ¥40,000 at the beginning of each
year.

Kobayashi incurred costs of ¥180,000 in manufacturing the equipment and ¥4,000 in sales
commissions in closing the lease. Kobayashi has determined that the collectibility of the lease
payments is probable and that the implicit interest rate is 8%.

Kobayashi Group and JAL adopt SFRS(I) 16 Leases in accounting for this lease. Both companies
have a 31 December financial year end.

Part IV
What is the lease by Kobayashi classified as?

1. Operating lease
2. Sales type lease
3. Finance lease

Part IV
What is the lease by Kobayashi classified as?

1. Operating lease
2. Sales type lease
3. Finance lease

Part IV
(a) Discuss the nature of this lease in relation to the lessor and compute the amount of
each of the following items.
1. Lease receivable
2. Sales Price
3. Cost of goods sold

Nature of lease:
1. 10 out of 12 years of economic life
2. Present value of the lease payments (¥289,876 > 90% of machine’s
fair value of 299,140)
3. Kobayashi Group is a manufacturing company and will manufacture
the check in kiosk to lease to JAL

Thus, we can conclude that the nature of the lease is that of a sales type
lease.

Part IV
(a) Discuss the nature of this lease in relation to the lessor and compute the amount of
each of the following items.
1. Lease receivable
2. Sales Price
3. Cost of goods sold
Lease receivable = gross investment
= 40,000 x 10 + 20,000
= ¥420,000

Sales Price is the lower of PV of LPs or Fair value

n = 10, i= 8%, PMT = 40,000, FV= 0
PV of LPs = ¥289,876

According to SFRS(I) 16 para 71(b), the cost of sale being the cost, or carrying
amount if different, of the underlying asset less the present value of the
unguaranteed residual value.
COGS = Cost - PV of UNGRV
= (180,000)- (20,000/1.08^10)
= ¥170,736

Part IV
(b) Prepare a 10-year lease amortization schedule for Kobayashi, the lessor.

Unearned interest income = G - PV(G)

= 420,000 - 299,140
= ¥120,860

Rounding error*

Part IV
(c) Prepare all of the lessor’s journal entries for the first year.

Include in start of Year 1

DR Cash
40,000
CR Lease Receivable
40,000

Part IV
Thank you