Question:

On 1 July 2020, a University enters into a 5-year lease of a building owned by an insurance company that has a remaining useful life of 10 years. Annual lease payments amount to $50,000 and are payable on 30 June each year. Initial direct costs (paid on 1 July 2020) incurred by the University to ensure social distancing and the university internal sanitary standards amount to $20,000. The University has also received on 1 July 2020 incentives from the insurance company amounting to $5,000. The fair value of the asset amounts to $358,150. The unguaranteed residual value at the end of 30 June 2025 is $200,000.

Required:

Using the provisions of IFRS 16,

a) Compute the interest rate implicit in the lease (rounded off to the nearest integer) using trial rates of 3% and 7%.

b) Prepare an extract of the lease amortization table for years ended 30^th June 2021 and 2022.

c) Prepare journal entries in the books of the University for the year ended 30 June 2021.