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

for a further two years at the same annual payment rate. Melvic Ltd. will make expensive

modifications to the building at commencement of the lease and these modifications are expected

to have a useful economic life of 7 years. The terms of the lease relating to the building are as

follows:-

Date of entering lease 1 July 2020

Duration of lease 3 years (plus option for further 2 years at the same rate)

Lease payments Initial payment of $40,000 plus half yearly

payments of $60,000 payable at 31 December and

30 June

Implicit interest rate 12%

Cost of initial modifications paid in

cash at commencement of lease $96,000

Economic Life of modifications 7 years with zero scrap value

Required:

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.

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