QUESTION TWO: ACCOUNTING FOR LEASE

On 1 January 2019, Samson Limited leased a new machine from Easy Finance Limited. Easy Finance Limited had purchased the packaging machine that day for its fair value of $227,906. The term of the lease was four years. The packaging machine is expected to be scrapped at the end of the lease term.

The lease states: This lease is cancellable. However, another clause of the lease imposes a monetary penalty on cancellation of the lease equal to the simple total of the lease payments remaining at the time of cancellation. Under the lease agreement the machine is returned to Easy Finance Limited at the end of the lease.

There is an initial lease payment of $20,000 on the inception of the lease (on 1 January 2019) and lease payments of $70,000 (included in these payments is $10,000 representing payment to the lessor for insurance and maintenance of the machine) on 31 December each year thereafter (starting 31 December 2019). Samson Limited uses straight-line depreciation for its machinery.

Required:

a) Calculate the interest rate implicit in the lease.

b) Provide ALL the necessary journal entries relating to any lease liabilities and leased assets in the books of Samson Limited on 1 January 2019 and for the year to 31

December 2019.

c) Briefly explain how lessees and lessors are required to account for initial direct costs under NZ IFRS 16.

Note: Present value tables are provided below.

Show all your workings(calculation and explain)

PRESENT VALUE TABLES Present Value of $1 in n periods Period 1 2 3 4 5 4% 0.9709 0.9612 0.9423 0.9238 0.9057 5% 6% 0.9524 0.9434 0.9070 0.8900 0.8638 0.8396 0.8227 0.7921 0.7835 0.7473 7% 0.9346 0.8734 0.8163 0.7629 0.7130 8% 9% 0.9259 0.9174 0.8573 0.8417 0.7938 0.7722 0.7350 0.7084 0.6806 0.6499 10% 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value of an annuity of $1 per period for n periods No. of Periods 1 2 3 4 5 4% 0.9615 1.8861 2.7751 3.6299 4.4518 5% 0.9524 1.8594 2.7232 3.5460 4.3295 6% 0.9434 1.8334 2.6730 3.4651 4.2124 7% 0.9346 1.8080 2.6243 3.3872 4.1002 8% 0.9259 1.7833 2.5771 3.3121 3.9927 9% 0.9174 1.7591 2.5313 3.2397 3.8897 10% 0.9091 1.7355 2.4869 3.1699 3.7908