IFRS 16- Leases

Q.No.1: MAS Company entered into finance lease arrangement on July 1, 2008, for an
equipment and paid initial deposit of Rs. 500,000. The lease agreement requires payments of
five annual instalments of Rs.7,584,000 each on June 30, from 2009 to 2013. Interest rate
implicit in the lease is 9%. The annual instalments have been duly paid by the company on or
before June 30 every year. Had the plant been not leased it would have cost Rs. 30 million to
purchase the plant. Depreciation is charged on a straight-line basis over five-year period with
zero residual value.

Required:

Prepare relevant extracts of Statement of Profit or Loss and Statement of Financial Position
for the years ended June 30, from 2009 to 2013.

Q.No.2: Brothers Ltd., has leased (a non-cancellable lease) a knitting machine under the
following terms:

 The lease is to commence on July 1, 2011.

 Lease term is 5 years.
 Lease instalments are to be payable each year in advance, Rs.120,000.
 Cash price and fair value of the machine is Rs.500,000 as at July 1, 2011.
 The present value of minimum lease payments is also the same i.e., Rs.500,000.
 Implicit rate of interest is 10%.
 Estimated life of the machine is 5 years.
 The company depreciates the knitting machine at 20% using straight-line method.

Required:

a) Prepare lease amortization schedule for the knitting machine.

b) Prepare necessary journal entries for the period ended June 30, 2012.
c) Prepare extracts of the statement of profit or loss and statement of financial
position of Brothers Ltd., for the year to June 30, 2012.

Q.No.3: The lessor, ABL Financing Company, leases an asset, which it purchased for Rs.
540,000, to a textile company Ammar Textile under a finance lease arrangement. The lease
is for three years and comprises six equal payments of Rs. 105,878.25 each paid in advance.
The lease commences on January 1, 2013. The rate of interest implicit in the lease is 14% per
year. The estimated useful life of the asset is three years and has no residual value at the end
of its useful life.

Required:

Show the relevant extracts from the accounts of Ammar Textile at the year-ended June 30,
2013 according to IFRS 16.
Q.No.4: Gem & Co., acquired an asset on finance lease. The lease term is for three (3) years
at a rental of Rs. 222,635 per half year payable in advance. The lease Commences on January
1, 2015 and fair value of the asset is Rs. 1,500,000. A deposit of Rs. 300,000 was also
payable on January 1, 2015. The Director of Gem & Co., considers that the asset has a useful
life of five (5) years. The rate of interest implicit in the lease is 4.5% per half year. It is
expected that the assets will be transferred to Gem & Co., at the end of the lease term.

Required:
Prepare "Lease Amortization Schedule'.

Q.No.5: Al-Karam Company acquired a non-current asset on lease. The assistant accountant
is confused as to whether this lease should be treated as finance lease or operating lease.
Assume that you are manager of finance department in the Company. You are required to
guide him explaining the situations that individually or in combination would normally lead
to a lease being classified as a finance lease or operating lease in accordance with IFRS 16?

Q No. 6: X Ltd is considering acquiring a machine. It has two options; cash purchase at a
cost of Rs. 11,420,000 or a lease.

The term of the lease are as follows

(i) The lease period is for four years from 1 January 2016 with an annual rental of Rs.
4,000,000 payable on 31 December each year.
(ii) The lessee is required to pay all repairs, maintenance and other incidental costs.
(iii) The interest rate implicit in the lease is 15% p.a.
Note:

Estimated useful economic life span of the machine is four years.

Required

a) Prepare a schedule of the allocation of the finance charges in the books of X limited
for the entire lease period.
b) Prepare an extract of the statement of Financial Position of X Limited for the year
ended 31 December 2016.
Q No. 7: On 1 July 2014, Miracle Textile Limited (MTL) acquired a machine on lease from
the bank.

Details of the lease are as follows:

(i) Cost of machine is Rs. 20 million.

(ii) The lease term and useful life is 4 years and 10 years respectively.
(iii) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv)The interest rate implicit in the lease 15.725879%.
(v) At the end of lease term, MTL has an option to purchase the machine on payment of
Rs. 2 million. The fair value of the machine at the end of lease term is expected to be
Rs. 3 million.
MTL depreciate the machine on the line method to a nil residual value.

Required
Prepare relevant extracts of the statement of financial position and related notes to the
financial statements for the year ended 30 June 2016 along with comparative figures. Ignore
taxation

Q No. 8: Shoaib Leasing Limited (the lessor) has entered into a three-year agreement with
Sarfaraz Limited (the lessee) to lease a machine with an expected useful life of 4 years. The
cost of machine is Rs. 2,100,000.

The following information relating to lease transaction is available:

(i) Date of commencement of lease is July 1, 2016.

(ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease
term, the value of the machine will be Rs. 300,000.
(iii) Lease installment of Rs. 860,000 are payable annually, in arrears, on June 30.
(iv)The implicit interest rate is 12.9972%.
Required

a) Prepare the journal entries for the years ending June 30, 2017, 2018 and 2019 in the
books of lessor, Ignore tax.
b) Produce extracts from the statement of financial position including relevant notes as at
June 30, 2017 to show how the transactions carried out in 2017 would be reflected in
the financial statements of the lessor.
(Disclosure of accounting policy is not needed)