Question
Juccy plc is a service company with a financial year-end on 31 December. In 2021, it has entered into two contracts as detailed below. On
Juccy plc is a service company with a financial year-end on 31 December. In 2021, it has entered into two contracts as detailed below.
On 1 January 2021, it has signed an agreement with Frab plc to rent a van with registration number KJ 176 JN for a period of four years. At the end of the contract the van will be returned to Frab plc. Under the terms of the lease, Juccy plc has agreed to pay 4,000 on a yearly basis commencing on 31 December 2021. Juccy has the exclusive right to use the van and the right to direct how and for what purpose the van is used for the duration of the contract. The van has an estimated economic life of eight years and it is expected to have a nil residual value at the end of its life. It is depreciated using a straight-line depreciation applied on a strict time basis.
On 1 November 2021, Juccy has signed an agreement with Pierca plc to rent a tractor for a period of 18 months for a monthly rent of 300 which will be paid at the end of each month. According to the agreement, Pierca plc will decide which tractor to assign to Juccy plc at beginning of the contract. Pierca plc has the right to assign to Juccy plc a different tractor with similar characteristics at any time during the contract depending on its needs.
The actualization rate that Juccy plc uses is equal to 3% per year.
REQUIRED:
- Prepare the extracts of Juccy plcs Statement of Comprehensive Income and Statement of Financial Position for the years ended December 31, 2021 to 2023 in accordance with the extant accounting standards and practice. Assume that the company elects to adopt any exempted accounting treatments where possible.
Explain if and why these leases are within the scope of IFRS 16, Leases.
[The accounting policy notes and disclosure notes are not required. Clearly show your workings and state any assumptions you have made.]
- Illustrate the problems that arise when leases are treated as Off-Balance Sheet (OBS) financing.
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