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Rolex Ltd leased a highly specialised machine with a ten- year useful life on January 1, 2020. The lease agreement is for an initial

 

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Rolex Ltd leased a highly specialised machine with a ten- year useful life on January 1, 2020. The lease agreement is for an initial three-year period with the option to extend the lease for a further two years. Based on discussions had with the lessor, the likelihood of exercising the lease extension option is very high. Rolex has agreed to make payments of $7.8 million per year in arrears, a fifth of which relates to annual insurance premiums. The agreement also entails Rolex guaranteeing that the machine will have a residual value of $1.5 million at the end of the lease. The company generally depreciates similar assets using a straight line basis down to the asset's residual value. The incremental borrowing rate is 14%, while the interest rate implied in the lease is two percent lower. On the date of signing the agreement, Rolex received a lease incentive of $500,000 in the form of a cash rebate. Legal fees of $980,000 were incurred for the drafting of the lease agreement. REQUIRED: Determine the right of use asset and lease obligation as at January 1, 2020 Prepare the amortisation schedule for the term of the lease Prepare the relevant financial statement extracts for the financial year to December 31, 2020 Show the journal entries that would be relevant for the final year of the lease

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To determine the rightofuse asset and lease obligation as of January 1 2020 we need to calculate the present value of lease payments The lease term consists of the initial threeyear period and the opt... blur-text-image

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