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Question 8) On 1 July 2020 Mel Ltd leased a machine to Zed Ltd for 5 years. Zed Ltd pays $250 000 per year, in arrears. Thus the first payment occurs on 30 June 2021. Included in the $250 000 per year is a reimbursement for maintenance costs, amounting to $30 000 per year. The indicators show that the lease is a finance lease from Mel Ltds perspective. The useful life of the machine is 6 years. The machine will be returned to Mel Ltd after the lease term. Zed Ltd pays initial direct costs of $30 000. Mel Ltd pays initial direct costs of $20 000. The residual value of the machine after 5 years is $90 000 of which Mel Ltd guarantees $60 000 (guaranteed residual). The interest rate implicit in the lease is 5%. You may ignore tax. (Note PVIFA(n,i) = present value interest factor of an annuity of n payments of $1 where the interest rate between payments is i; PVIFL = present value interest factor of a lumpsum of $1 at the end of n periods, where the interest rate per period is i). Consider the present value of an annuity table and present value of a lumpsum table in the test folder.

5. Based on the scenario in question 8, which of the following is correct:

a) The Lessee will depreciate the right-of-use asset over 5 years

b) The lessee will depreciate the right-of-use asset over 6 years

c) The lessor will continue to depreciate the machine over 6 years

d) None of the answers are correct

6. Based on the scenario in question 8, which of the following is incorrect:

a) The lessee will split each annual payment of $250 000 into maintenance reimbursement expense of $30 000, and the $220 000 will be apportioned into an interest and capital portion

b) The maintenance reimbursement cost is an expense for the lessee and will be closed off to profit and loss

c) The portion of interest expense will be higher at the beginning of the lease since the capital outstanding is higher

d) None of the answers are incorrect

7. Based on the scenario in question 8, at commencement date which of the following is incorrect:

a) The a lessor will recognise a lease receivable equal to the net investment in the lease.

b) The net investment in the lease = the gross investment in the lease discounted at the interest rate implicit in the lease.

c) The gross investment in the lease = annuity of 5 payments of $220 000 plus guaranteed residual ($60 000) plus unguaranteed residual ($30 000)

d) The gross investment in the lease = annuity of 5 payments of $220 000 plus guaranteed residual ($60 000)

8. Based on the scenario in question 8, with the following change - the 250 000 is paid in advance, not arrears, and that the interest rate implicit in the lease is i. Which of the following is incorrect:

a) The lessee will recognise a lease liability on the balance sheet on commencement date of: 220 000 x (PVIFA(n=4, i) + 60 000 x (PVIFL(n=5,i))

b) The lessee will recognise a lease liability on the balance sheet on commencement date of: 220 000 x (PVIFA(n=5, i) + 60 000 x (PVIFL(n=5,i))

c) The lessee will recognise the right-of-use asset in the balance sheet date on commencement date of 220 000 + 220 000 x 220 000 x (PVIFA(n=4, i) + 60 000 x (PVIFL(n=5,i)) (i.e. lease payment on commencement date plus lease liability)

d) None of the answers