LEASES

1) Rapple Ltd. (the lessee) enters into a 5-year lease of a floor of a building, with an option to extend the lease for a further 5 years. Lease payments are $50,000 per annum during the initial term and $55,000 per annum during the optional period, all payable at the beginning of each year. To obtain the lease, Rapple Ltd. incurs initial direct costs of $20,000 consisting of $15,000 to the former tenant occupying the floor and $5,000 for real estate commissions). The lessor agrees to reimburse the apple Ltd. the real estate commission of $5,000. At the commencement date, apple concludes that it is not reasonably certain to exercise the option to extend the lease. Therefore the lease term is 10 years. The rate implicit in the lease is not readily determinable. apple's incremental borrowing rate is 5% per annum. This rate reflects the fixed rate at which it could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 10-year term, with similar collateral. REQUIRED Show the relevant journal entries to record the above transactions in the books of Rapple Ltd. (10 Marks)

2) A company enters into a 4-year lease commencing on 1 January 20X1 (and intends to use the asset for 4 years). The terms are 4 payments of $50,000, commencing on 2 January 20X1, and annually thereafter. The interest rate implicit in the lease is 7.5% and the present value of the lease payments is not paid at 1 January 20X1 (i.e. 3 payments of $50,000) discounted at that rate is $130,026. Legal costs to set up the lease incurred by the company were $402. REQUIRED Show the lease liability from 1 January 20X1 to 31 December 20X4 and explain the treatment of the right-of-use asset. (20 Marks)