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. will make expensive modifications to the building at commencement of the lease and these modifications are expected to have a useful economic life of 7years. The terms of the lease relating to the building are as follows:-

Date of entering lease 1 July2020

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

Leasepayments 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 Lifeof 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 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.