ACC208: Intermediate Financial Accounting:

BBB Ltd ("BBB") is in the business of providing storage facilities. On 1 January 20x1, it buys over an industrial building along Sim Lim Road for $40 million. The industrial building consists of twenty different units and has a lease term of 30 years. On 1 January 20x1, AAA Ltd ("AAA") enters into a three-year non-cancellable contract with BBB for the use of one of the units, specifically unit #02-08, to store its inventory. Under the terms, AAA has exclusive use of the unit and BBB may regain rights to that unit during the contracted period by compensating AAA substantially by providing a similar or better unit acceptable by AAA coupled with costs of relocation and cash compensation.

AAA will make annual payments of $120,000 at the end of each year on 31 December, with the first payment made on 31 December 20x1. AAA also incurs and pays initial direct costs amounting $10,000 on entering the contract. An option for an additional twoyear extension after the end of the three-year contract at $125,000 per annum is available. At the commencement date of the contract, AAA is not reasonably certain of exercising the renewal option. On 1 January 20x1, the implicit interest rate mutually agreed upon is 5%.

Both AAA and BBB adopt the Singapore Financial Reporting Standards (FRSs), use the straight-line depreciation policy and have December 31 year-ends. When presenting your answers, please round all answers to the nearest dollar.

Required:

(a) Identify whether there is a lease arrangement under FRS 116 Leases.

(4 marks)

(b) Apply FRS 116 Leases and illustrate the accounting of the above arrangement by preparing the necessary journal entries (narrative not required) for AAA Ltd for the years ended 31 December 20x1 and 31 December 20x2. (16 marks)

(c) Apply FRS 116 Leases and describe how BBB Ltd should account for this arrangement.(5 marks)