Lessee Ltd.- Lease Case Essay

944 Words Nov 16th, 2012 4 Pages
| Lessee Ltd.- Lease Case | | | | |

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1. Was the junior accountant’s analysis correct? Why or why not?
No, the junior accountant’s analysis is not correct in classifying the lease as an operating lease in accordance with IFRS. Whether or not a lease is classified as a finance or an operating lease depends on if all of the benefits as well 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 major portion of the asset’s economic life” or “at the inception of the lease the present value of the minimum payment amounts to at least substantially all of the fair value of the lease asset.” With
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* 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 Accountant’s computations would change. First you would allocate the payments based 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 Obligation 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 | 1 | $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 entry to record the lease obligation would have to

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