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Unifood Pty. Limited entered a lease agreement with Charlatan Pty. Limited for the lease of a building on the 1st of July 2018. The lease

Unifood Pty. Limited entered a lease agreement with Charlatan Pty. Limited for the lease of a building on the 1st of July 2018. The lease was for five years and the terms required payments of $40,000 per year. The estimated economic life of the building is 40 years. The market value of the building is $20 million. Lease payments are made at the end of each financial year.

Required:

(1) Under the new accounting standards AASB 16, discuss whether the lease agreement will be considered an operating lease or a finance lease to the lessee. Explain your answers.

(2) Prepare journal entries for the lessor – Charlatan Pty. Limited at the end of each financial year.


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