Question 4.

Marks: 12

(a) Apple Rate Ltd (that is, the lessor) enters into a non-cancellable lease with a six-year term for an item of

machinery, which has an expected useful life of nine years, with Zebra Ltd (that is, the lessee).

Apple Rate Ltd has indicated to Zebra Ltd that the lease is renewable for a further period of two years at

commercial rates prevailing at the time of renewal.

The present value of the minimum lease payments is equal to 70 per cent of the fair value of the leased

machinery at the commencement of the lease.

The remaining 30 per cent of the fair value represents residual value guaranteed by an independent third

party, an investment bank. The investment bank is unrelated to Apple Rate Ltd or Zebra Ltd.

(6 marks)

(b) Roman Jubilee Ltd (that is, the lessor) enters into a non-cancellable with a five-year term for a plant, which

has an expected useful life of nine years, with Zealous Ltd (that is, the lessee).

The lease is renewable for a further three years at commercial rates prevailing at the time of renewal.

The present value of minimum lease payments is equal to 60 per cent of the fair value of the plant at the

commencement of the lease. The residual value in this agreement is not guaranteed by the Zealous Ltd, and

the plant will revert to the Roman Jubilee Ltd.

Zealous Ltd has written a separate agreement put option on with Roman Jubilee Ltd.

This entitles, in five years' time for Roman Jubilee Ltd to put (or sell) the plant to Zealous Ltd, either to an

amount equal to 80 per cent of the residual value of the lease or 80 per cent of the market value of the plant

at that time, whichever is lower.

(6 marks)

Required:

In relation to each of the above lease transactions, state the manner in which the lease should be classified by

under AASB (Australian Accounting Standards Board) 117 Leases (using the preceding accounting standard);

(i) by the lessee, and

(ii)

by the lessor.

Provide the reasons for your answers.