Liquidity ratio 1.88 1.85 1.59 157 1.41 Alter the analysis of detailed financial statement you have come across the transaction involving one of the machines being used by CEC in the production plant which was leased from ZESCO. ZESCO leased this new asset to CEC under a 5-year, non-cancefable contract starting January 1, 2018. Terms of the fease require payments of S485,550 each January , starting January 1, 2018. The machine ha an estimated life of years. The estimated guttanteed walde is $800,000, stile the residualnie is expected to $450.000 at the end of the lease em No bngan purchase or new options are induded in the contractat not a specialized asset. CEC Page 6 of 8 T and ZESCO s financial year end is at December 31 all the risks and rewards of the machine are for ZESCO. The interest rate implicit in the lease B%CEC depreciates similar assets using staight-ine. You have noticed that CEC has accounted for this lease as an operating Required a) Citing relevant accounting standards explain why CEC might have accounted for this as an operating lease. And show the journal entry that was recorded by CEC in 2018 and 2019 (3 marks) b) Assuming that in 2018 CEC went for the early adoption of the new IFRS 16 lease standard. Discuss the accounting treatment that should have applied by the CEC on this lease contract.( 4 marks) c) Prepare all the entries relating to the treatment In (b) for the years 2018 and 2019 that CEC should record. (10 marks) d) Citing relevant accounting standards and using supporting figures explain how and why the 2017 financial statements will be affected by this early adoption. (4 marks) e) With the help of supporting figures, explain the effect that this adoption will have on the above income statement and above statement of financial position extract for the years 2018 and 2019(8 marks) With the help of supporting figures explain the effect that this adoption will have on the above cash flow extract for the years 2018 and 2019/5 marks) g) State the ratios which will be affected by the above adoptions and explain whether the ratio will increase or decrease and why. (6 marks) Page 7 of 8 Liquidity ratio 1.88 1.85 1.59 157 1.41 Alter the analysis of detailed financial statement you have come across the transaction involving one of the machines being used by CEC in the production plant which was leased from ZESCO. ZESCO leased this new asset to CEC under a 5-year, non-cancefable contract starting January 1, 2018. Terms of the fease require payments of S485,550 each January , starting January 1, 2018. The machine ha an estimated life of years. The estimated guttanteed walde is $800,000, stile the residualnie is expected to $450.000 at the end of the lease em No bngan purchase or new options are induded in the contractat not a specialized asset. CEC Page 6 of 8 T and ZESCO s financial year end is at December 31 all the risks and rewards of the machine are for ZESCO. The interest rate implicit in the lease B%CEC depreciates similar assets using staight-ine. You have noticed that CEC has accounted for this lease as an operating Required a) Citing relevant accounting standards explain why CEC might have accounted for this as an operating lease. And show the journal entry that was recorded by CEC in 2018 and 2019 (3 marks) b) Assuming that in 2018 CEC went for the early adoption of the new IFRS 16 lease standard. Discuss the accounting treatment that should have applied by the CEC on this lease contract.( 4 marks) c) Prepare all the entries relating to the treatment In (b) for the years 2018 and 2019 that CEC should record. (10 marks) d) Citing relevant accounting standards and using supporting figures explain how and why the 2017 financial statements will be affected by this early adoption. (4 marks) e) With the help of supporting figures, explain the effect that this adoption will have on the above income statement and above statement of financial position extract for the years 2018 and 2019(8 marks) With the help of supporting figures explain the effect that this adoption will have on the above cash flow extract for the years 2018 and 2019/5 marks) g) State the ratios which will be affected by the above adoptions and explain whether the ratio will increase or decrease and why. (6 marks) Page 7 of 8
