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
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)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started