As outlined in the business plan, the directors of Toy Warehouse Pty Ltd signed a three-year lease at $5,000 per month (GST-exclusive commencing 1 August 2020) for the premises at 11 Elland Road, Carindale.

 

A 2% annual rent increase is to take effect on 1 August each year. There is an option in the lease agreement to renew the lease for an additional three years at the expiration of the current lease and in perpetuity thereafter.

 

For the year ended 30 June 2021, the company made eleven (11) monthly lease payments totalling $55,000 (GST-exclusive). Suzanne has coded these payments to "rent expense" in the MYOB Profit and Loss Statement.

 

Being a bookkeeper, Suzanne did not know how to apply the principles contained in the recently introduced leasing standard, AASB 16 Leases.

 

She requests that you put through the appropriate journal entries to record the "right-of-use asset" and corresponding lease liability at 30 June 2021 and to also adjust the figures in the Profit and Loss Statement.

 

The following information is relevant for you to calculate the "right-of-use" asset and lease liability as per AASB 16 Leases:

 

§ First monthly lease payment (made in advance)                                 1 August 2020

§ Monthly lease payments for first 12 months (GST-exclusive)                          $5,000

§ Monthly lease payments for second 12 months (GST-exclusive) *                 $5,100

§ Monthly lease payments for third 12 months (GST-exclusive) **                     $5,202

§ Total undiscounted lease payments over 3-year period                              $183,624

§ Period of the lease (3 years)                                                                      36 months

§ Depreciation method                                                                                straight-line

§ Rent increase to take effect on 1 August each year                                           2.0%

§ Annual discount rate to be used for the 36 monthly lease payments               4.00%

 

 

*   calculated at $5,000 x 2.0% increase (for the period 1 August 2021 to 31 July 2022)

*   calculated at $5,100 x 2.0% increase (for the period 1 August 2022 to 31 July 2023)

 

Students will need to calculate the present value of the lease payments to determine the lease liability and then this will be the same amount as the "right-of-use" asset to be recorded in the Balance Sheet.

 

As noted above, the first monthly lease payment of $5,000 made on 1 August 2020 was made in advance. Hence, there was no interest in respect of the first lease payment.

 

 

Note:   There are 334 days from 1 August 2020 to 30 June 2021.


 Additional Information Relating to the Lease:

§ Being a new business, assume that there is no "reasonable certainty" at the inception of the lease (ie, 1 August 2020) that Christie and Grace will exercise the option to extend the lease term for an additional three years at the end of the original lease, which is due to expire on 31 July 2023. Hence, for the purposes of the leased (ROU) premises under AASB 16, assume that the right-of-use asset will be depreciated over three (3) years.

§ Assume that there were no initial direct costs incurred in drafting and signing the lease agreement. These costs were borne by the lessor, and not the lessee.

§ Assume that there were no prepaid lease payments made by Toy Warehouse Pty Ltd to the lessor.

§ Finally, assume that there were no lease incentives received, nor any 'make good provision' (ie. no costs are estimated to be incurred at the end of the three years to restore the leased premises to its original condition).


When drafting your external financial statements, please show the "right of use asset" as a separate line on the face of the balance sheet, with appropriate note disclosures.

Please make sure that you include your lease schedule for the premises as part of your case study submission.

 What are the general entries to this item, and prepare the lease schedule.