Melvic Ltd. has signed a contract to lease a store from Glen Caper Ltd. nearby for a non-cancellable period of three years. The arrangement also provides an option for Melvic Ltd. to renew the lease forafurthertwoyearsatthesameannualpaymentrate. MelvicLtd.willmakeexpensive modificationstothebuildingatcommencementoftheleaseand thesemodificationsareexpected tohaveausefuleconomiclifeof7years.Thetermsofthelease relating to the building are as follows:-

Dateofenteringlease Duration of lease Leasepayments

Implicit interest rate

Cost of initial modifications paid in cash at commencement of lease Economic Lifeof modifications

Required:

1 July2020

3 years (plus option for further 2 years at the same rate) Initial payment of $40,000 plus half yearly

payments of $60,000 payable at 31 December and

30 June

12%

$96,000

7 years with zero scrap value

For this lease:

a)Discuss and determine if the contract between Melvic Ltd and Glen Caper Ltd. contains a lease.

For the remaining sections of this question, assume that the contract contains a lease according to AASB16 Leases.

2.b)calculate the lease liability and lease asset for Melvic Ltd.;

3.c)prepare a full lease schedule for Melvic Ltd., showing the division of the lease rental into interest

and principal components;and

4.d)provide the journal entries for the lease transactions in the books of Melvic Ltd. for the financial

year ending 30 June 2021 (include journal entries at the inception 1/7/2020). Also include all relevant transactions pertaining to the modifications for the year ending 30 June 2021.

Marks = (2 + 2 +2 + 4 = 10 marks)

Please use the below performa for answers.

a)Discuss and determine if the contract between Melvic Ltd and Glen Caper Ltd contains a lease.

b)Calculate the lease liability and lease asset for Melvic Ltd.

Lease liability =

Lease asset =

c)Prepare a full lease schedule for Melvic Ltd., showing the division of the lease rental into interest and principal components

Date

Lease Payment

Interest expense

Principal reduction

Lease liability

d)Provide the journal entries for the lease transactions in the books of Melvic Ltd. for the financial year ending 30 June 2021 (include journal entries at the inception 1/7/2020). Also include all relevant transactions pertaining to the modifications for the year ending 30 June 2021.

Date

Particulars

Dr

Cr

WORKINGS

Workings for the questions should be included here.Please ensure you include them in the same order as your answers e.g. workings for part (a) in this section should appear before workings for part (b) etc.