Question
Snoop Ltd. has also signed a contract to lease an office and warehouse building from Eavesdropper Properties Ltd. nearby for a non-cancellable period of five
Snoop Ltd. has also signed a contract to lease an office and warehouse building from Eavesdropper Properties Ltd. nearby for a non-cancellable period of five years. The arrangement also provides an option for Snoop Ltd. to renew the lease for a further two years at the same annual payment rate. Snoop Ltd. will make expensive modifications to the building at commencement of the lease and these modifications are expected to have a useful economic life of 8 years. The terms of the lease relating to the building are as follows:-
Date of entering lease1 July 2019 Duration of lease5 years (plus option for further 2 years at the same rate) Lease payments Five annual payments of $100,000 all payable at the beginning of each year of the lease Implicit interest rate6% Cost of initial modifications paid incash at commencement of lease $96,000 Economic Life of modifications8 years with zero scrap value
Required:
For this lease:
a) Discuss and determine if the contract between Snoop Ltd and Eavesdropper Properties Ltd
contains a lease.
For the remaining sections of this question, assume that the contract contain a lease according to AASB16 Leases.
b) calculate the lease liability and lease asset for Snoop Ltd.; c) prepare a full lease schedule for Snoop Ltd., showing the division of the lease rental into interest and principal components; and d) provide the journal entries for the lease transactions in the books of Snoop Ltd. for the financial year ending 30 June 2020 (include journal entries at the inception 1/7/2019). Assume for these purposes that the lease payment due on 1st July 2020 is made on 30 June 2020. Also include all relevant transactions pertaining to the modifications for the year ending 30 June 2020.
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