Question
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
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.
- b)calculate the lease liability and lease asset for Melvic Ltd.;
- c)prepare a full lease schedule for Melvic Ltd., showing the division of the lease rental into interest
- and principal components;and
- 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.
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