PART A: (6 + 2 + 2 = 10 marks)

On 1 March 2020, Pizza Attack, a pizza company enters into a contract with Goodman, a shopping mall operator to use a space in the mall to sell its food and beverages for a five year period. The contract states the amount of space at the specific store, Unit 118, for the first three years. During the first three years period, Goodman will substitute the leased space with another available space at the discretion of Goodmans management on the 1st of January each year due to a New Years event. Otherwise, the leased space can only be substituted for repairs and maintenance purposes. During the last two years of the contract term i.e. the fourth and fifth years, the space may be located at any one of the several open areas within the mall. Goodman has the right to change the location of the space allocated to Pizza Attack at any time with minimal costs. Pizza attack will use a kiosk, which they own, to sell its goods that can be moved easily. There are many areas in the mall that are available and which would meet the specifications for the space in the contract. The contract also states that in addition to the monthly rent, Pizza Attack would need to pay a 20% cash arising from its sales revenue. Due to the current market trend, Domi-Yous, a competitor of Pizza Attack is considering to offer Goodman a 50% increase to the rent that Pizza Attack has agreed to pay Goodman.

Required:

a) Determine whether or not a lease exists, according to AASB16.

b) Identify the term of the lease (if any), according to AASB16.

c) Explain the difference between a residual value guarantee and a purchase option in calculating lease liability.

PART B (4 + 4 + 6 + 6 = 20 marks)

T24 Ltd (Lessor) has entered into an agreement to lease a customised equipment to BYO Ltd (Lessee). The lease agreements details are as follows: Length of lease 3 years Commencement date of lease agreement 1/7/2020 Quarterly lease payment, paid in arrears (at the end of each quarter) $44,000 Included within the $44,000 quarterly lease payments is an amount of representing payment to T24 Ltd for the insurance and maintenance of the equipment $4,000 Initial direct costs incurred (and paid) by BYO Ltd on 1/7/2020 $20,000 Commencement date of lease payment 30/9/2020 Estimated economic life of the equipment 15 years Estimated residual value of the equipment at the end of its economic life $20,000 Purchase option at the of the lease term available for BYO Ltd to exercise $60,000 Market value of the equipment at the end of the lease term $250,000 Interest rate implicit in the lease (per year) 8% Lessees incremental borrowing rate (per year) 13% Additional information: If the equipment needs to be serviced or repaired, T24 Ltd is required to substitute a equipment of the same type. Otherwise, and other than on default by BYO Ltd, T24 Ltd cannot retrieve the equipment during the three-year period. At the end of the lease term, assume the transfer of asset from T24 Ltd to BYO Ltd. BYO Ltd prepares financial statements at the end of every quarter.

Required:

a) Prepare a schedule of lease payments for BYO Ltd, for the period from lease inception to the end of the agreement.

b) Provide all journal entries relevant to the lease contract in the accounts of BYO Ltd

i) At inception of the lease (1/7/2020), including the initial direct costs.

ii) At the end of the first reporting quarter (30/9/2020), including the depreciation charges. iii) At the end of the lease contract, including the depreciation charges. (4 + 4 + 6 + 6 = 20 marks)

PROFORMA FOR PART B

Date	Lease Payment	Interest Expense	Principal Reduction	Lease Liability