QUESTION TWO: Accounting for Leases

You are a Chartered Accountant working for Apex Limited (Apex). You report to Tim Fairhall, the financial controller. Apex has entered into a lease agreement for a piece of equipment from National Leasing Limited (NLL). The lease contract gives Apex the right to use the equipment for the period of the lease. The equipment is an identified asset and the contract is a lease for the purposes of NZ IFRS 16: Leases. The lease commences on 31 March 2019 and ends on 31 March 2022. It includes the following key terms:

Lease payments: Four equal annual payments of $65,000 with the first payment to be made on 31 March 2019. Included $5,000 within these payments for insurance and maintenance of the equipment.

Purchase option: Apex has the option to pay an additional $40,000 on 31 March 2022, which will result in the transfer of legal ownership of the equipment. Apex is reasonably certain of paying this amount as it intends to use the equipment for a further two years beyond the end of the lease.

Interest rate: The interest rate implicit in the lease is 9%.

Additional information: The estimated useful life of the equipment is six years for accounting purposes.

Apex uses the straight-line depreciation method.

Apex incurs $4,000 in legal costs for arranging the lease.

Required: (a) Determine the initial measurement of lease liability and the amount to be recognised for the right-of-use asset.

(b) Prepare Apex Limiteds lease repayment schedule

(c) Prepare the journal entries for Apex for the years ending 31 March 2019 and 31 March 2021 (Ignore any tax effect entries).

(d) Identify four possible implications of NZ IFRS 16 Leases standard on a lessee entitys financial statements.

Explain all questions with clear explain and calculation if have