GFA $711-$ Financial Accounting $3102^{nd}$ Opportunity Practice Questions

Question $1$

ABC Limited enters into a contract with Property Limited for the lease of five floors of an office building. The exact floors are specified in the contract and Property Limited is not permitted to relocate tenants to other floors of the building.

The commencement date of the lease is July $2023,$ and the duration of the lease is for five years with the option to extend for a further five years. ABC Limited is reasonably certain to exercise the option to extend the lease.

The lease payments are $N$$$200000$ per annum during the initial term and $N$$$250000$ per annum during the optional term, all payable in advance.

ABC Limited incurred initial direct costs of $N$$$100000,$ comprising $N$$$85000$ as compensation to the tenant formerly occupying the five floors and $N$$$15000$ as agents commission. These are paid on $1$ July $2023.$ Property Limited agrees to reimburse the $N$$$15000$ agent's commission.

The interest rate implicit in the lease is not readably determinable. ABC Limited's incremental borrowing rate is $5\%$ per annum. The following present value table is provided:

PV factor

Present value annuity in advance of $N$$$1$ for years $1$ to $5,$ discounted at $5\%-4,5459$

Present value annuity in advance of $N$$$1$ for years $6$ to $10,$ discounted at $5\%-3,5619$

Required:

a$)$ Calculate the amount to record as the initial lease liability and the right of use asset, explaining your answer.

b$)$ Prepare the journal entries in the accounting records of ABC Limited for the year ending $30$ June $2024$ and $30$ June $2025.$ Ignore tax.