Question
IFRS 16 - Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption
IFRS 16 - Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15 - Revenue from Contracts with Customers is implemented also. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17 - Leases, the previous standard. 1) On 1 May 2018, Master Ltd entered into an agreement to lease a building for a 10-year period. The lease terms stipulated that the annual lease rental would be K200,000 per annum in arrears, with the first payment due on 30 April 2019. The interest rate implicit in the lease is 7%, and the present value of the minimum lease payments is K1,404,716. Manfred incurred costs of K60,000 in entering the lease. The lease terms allow for the extension of the lease at market rental. However, it is not certain that Manfred will take up this option. 2) On the same date, Master Ltd entered into an agreement to acquire a motor vehicle. The terms of the agreement were that the vehicle would be leased for 5 years from the date of inception, subject to a deposit of K39,944 and 5 annual payments of K13,000 in advance, commencing on 1 May 2018. The fair value of the vehicle and the present value of the lease payments were K96,000 at inception. The interest rate implicit in the lease is 8%. Required: (a) Outline the key principles behind the accounting treatment for leases as required by IFRS 16. (6 marks) (b) Show, with appropriate calculations, the accounting entries required to record each transaction above for the year ended 30 April 2019. Present the relevant extracts from the statement of profit or loss for the year ended 30 April 2019, and the statement of financial position as at that date. (14 marks)
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