# Part A

Date

(1)
Lease payment (\$) Interest expense (\$) (b) Principle reduction (\$) (c) 119,016 127,347 196,262 \$470,180 Outstanding balance (\$) (d) 442,625 323,609 196,262 (1)

01/07/09 30/06/10 30/06/11 30/06/12 Total

150,000 150,000 210,000 \$510,000

30,984(a) 22,653 13,738 \$39,820

Workings: PV of lease payment PV of guaranteed residual 150,000 60,000 N=3, I=7 N=3, I=7 393647.4 48977.9 442625 (a) Because the first lease payment is paid at the end of the first year of the lease term, there is a discount (7% discount rate) to the first lease payment, so there is a interest expense. (b) Each period’s interest expense is equals to the outstanding balance of the last period * 7% (discount rate). (c) Each period’s principle reduction is equals to the Lease payment in the period – interest expense in that period. (d) Each period’s outstanding balance is an equal to the outstanding of the last period – the principle reduction in that period. Except for \$442,625, which is the fair value of the machine at 01/7/09.

(2) Journal entries in the records of Jagaroth Ltd for the years ending 30 June 2010 and 30 June 2011. 01 July 2009 Dr Lease machine 442,625 Cr Lease liability 442,625 (Initial recording of lease asset/liability) 30 June 2010 Dr Lease liability Dr Interest expense Cr Cash (Lease payment of 150,000)

119,016 30,984 150,000

4 48.000 30.542 Cr Accumulated lease depreciation (Depreciation charge for the period [470.114(a) 1 July 2009 30 June 2010 30 June 2011 30 June 2012 (a) PV of lease payment PV of guaranteed residual PVof unguaranteed residual 150.000]/3) 127.000) 127.000 240. 30 June 2011 Dr Lease liability Dr Interest expense Cr Cash (Lease payment of 150.000.701 117.812 224.347 22.000]/3) *Because the machine will be returned at the end of the lease term.000 32.Dr Depreciation expense 127. I=7 N=3.513 224.542 (Depreciation charge for the period [470.647.9 24.299 0 393.000 60. the useful life is the lease term of 3 years and the depreciable amount is the cost less the guaranteed residual value of \$60.698 24.542 (3) Schedule of lease receipts for Davros Ltd Date Lease payment Interest expense Principal reduction Outstanding liability balance 467.000 N=3.114 .181-60.000 150.9 467. I=7 150.302 125. I=7 N=3.977.000 Dr Depreciation expense 127.299 349.542 Cr Accumulated lease depreciation 127.181-60.488.487 15.653 150.

698 117.302 To record the receipt of lease payment 30 June 2011 Dr Cr Cr Cash Interest Revenue Lease Receivable 150.114 To substitute the lease receivable for the asset 30 June 2010 Dr Cr Cr Cash Interest Revenue Lease Receivable 150.000 24.513 .487 125.114 467.000 32.(4) 1 July 2009 Dr Cr Lease Receivable Machinery 467.

So the accounting treatment under each approach is sufficient difference. a lease should fall into operating lease (AASB 117. to classify a lease into financial and operating lease. para 4). rewards could be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realization of a residual value (AASB 117. Furthermore. In terms of risks. their effects on financial statement should be determined to conclude whether the general purpose of financial statement are achieved. AASB 117. para 8 states that a leased is classified as finance lease if it transfers substantially all the risks and reward incidental to ownership that is if the majority of risks and rewards are transferred to the lessee then this transaction is considered to be a finance lease. On the other hand. the leased property has to be recognized as assets and liabilities in the balance sheet at fair values. for finance leases. In order to look into the usefulness of information provided by each approach. it depends on whether the lease transfers substantially all the risks and rewards incidental to ownership of an asset (AASB 117. On the side of lessee. The . para 4). para 7). it includes the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions.Part B In lease accounting. Otherwise. The different effects under financial and operating leases on financial statement reflect exclusive accounting measurement both in initial recognition and subsequent stages (AASB 117).

1991). The organization’s income statement will also be affected because interest expenses associated with the lease must be recognized as an expense. In income statement. para 39). However. As the lease payments are received.discount rate of calculating the present value of the minimum lease payments can be applied by using the interest rate implicit or incremental borrowing rate In addition to the purchase cost of the asset. para 33). for financial leases. generally. Cost incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognized as an expense when the . Operating leases on the other hand are recognized as an expense on a straight line basis over the leases term. any initial direct costs are to be recognized in the asset value (AASB 117. para 36). para 20). this does not mean that the lessee owns the lease equipment or has the right to depreciate it for tax purpose. For financial lease related to manufacturer or dealer. the finance revenue should be recognized on a constant periodic rate (AASB 117. (AASB 117. On the side of lessor. the principal portion of payments reduces the lease receivable. The effect of operating leases will only be reflected in the income statement as a decrease in net profit. in balance sheet the assets should be removed and a lease receivable is created in the same amount (AASB 117. as well as the property depreciation arising from intangible assets. It depends on the terms of the lease agreement that the lesser may purpose or disposal the property at the end of the lease (Kane. the lessor should recognize selling profit or loss in the period as normal sales entity.

For operating leases however all excess sale proceeds will be recognized immediately at fair values. If the lease it treated as an operating lease. 、 To some degree. So operating lease seems to have greater fluctuation in income statement. the lessor will keep the leased asset on its balance sheet and recognize depreciation expense on the leased asset (AASB.selling profit is recognized (AASB 117. financial lease seems to give better reality of the entity’s financial position as it recognize the fair value of the asset being leased which allows statement users to predict the future operation capability of the lessee company. However. para 50) In sale and leaseback transactions. it may mislead the users that the leased property is still operation on behalf of the lessor (Lipe. the user can also assess the exact value of assets being leased out as the leased asset is removed from balance sheet (Ingberman. the title of the property is not transferred. para 42). the potential any future benefits of the leased property are transferred from lessor to lessee. Under operating lease. but in turn it arises its net income. Under the lessors’ books. So a financial lease may decrease the lessor’s net asset. 1991). although. para 59). finance leases will have any excess sale proceeds amortized over the lease term. Ronen & Sorter. both of approaches provide sufficient useful information to financial statement users. So some surveys have proved that users prefer financial statement under financial . 1979) This is a more realistic approach because once assets are leased. (AASB 117. the lessor simply recognizes the lease payment as rental income. para 61). (AASB 117. In addition.

2006). To sum up. there are prescribed disclosure requirements for reporting entity. users still find difficulty in measuring lease obligations because the operating lease provide lessees with off-balance-sheet financing (Durocher. to evaluate the usefulness of information provided by each approach. 1991). as the leased property has to be recognized as assets and liabilities in the balance sheet at fair values. The main difference is that under financial lease. Although. it will increase the reported debt-equity ratio. financial leases and operating leases are treated very differently due to difference accounting measurements. It gives a better picture of the company’s financial position and accounting data interrelationship (Fleming. important financial ratios could be one of the best measurements that they are transformations of financial statement data and it is for statement users to aid decision making. . Also working capital (current assets minus current liabilities) is reduced by the present value of lease payments in the coming year. Furthermore. (Shillinglaw. a common measurement of organization leverage. 1991). Several studies report that market measures of shareholder risk are associated with the obligations implicit in the lessee’s unrecorded leases (Lipe. (Shillinglaw.lease approach to make decision. Many other ratios are also facing different degree of effect which are attracted by management to use operating lease approach which provide more incentives to report better performance measures (Kane. 2002). Under financial lease method. 2002). 2008). Consequently.

it provides more useful information for financial statement users. which should be reflected in the balance sheet. operating lease is measured as revenue or expense. which affects the company’s income statement.the leased property is recognized as asset and liability. On the other hand. As the approach of financial lease better reflect the financial position and future operating capacity. .

(2008). 15 (3). 299-310. (1991). Shillinglaw. Canadian Evidence of the constructive capitalization of operating leases. 5 (7). (2006). W. & Ngiam.Reference Durocher. 16-17. 227-256. G. . Accounting Handbook – 2008. & Bosco. 7(3). Leasing and financial statements. Fleming. 23-34. (2002). Australia. (2001). How lease capitalization will affer financial ratios. Know how lease types affect fnancial statement. & Sorter. M. Shying. Kane. M.. J. 23(6). Lipe. 581-592. Lease accounting research and the G4+1 proposal. Accounting Horizons. J. (2008). Sylvain. G. 3 (2).. R. Pearson Australia Group. Ronen. Financial Executive.. (1979). Lease Accounting: are current rules as bad as some say?. Accounting Review. Healthcare financial management. M. 28-31. Accounting Perspective. Ingberman.. Financial analysis journal. J.

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808002894.90/ .8 .3810770/ 92.90.80/ .   38.80/.8 900.425.8809-030.9 :8078 570107 13.8 7039..94333..0 /0. 94 2.3.3. 89.88088900.89.3.:08  \$ 5.3 #4303 \$47907  %8 8 .00/8 .93 0.84.843  \$3. ../90:80789...0.902039 :3/07 13.94: 9099041905745079834997.430/0570.7.-9419008800.420    1 90 0. 2470 70..9.0574.2039 .039:801:31472.280.00/8-070.9:.7097.7.880987024.9901:9:704507.0 ..8809 43 98 -.420  3 .80 9 970.0/1742-.:04190.0.902039   %48420/0700 -4941..80/  90 549039.7.430901.943.9439413.88098-030..08009 3-072.80/ 5745079.548943..0 574..5.9 90 0.7808983093.80/.3 1:9:70 -0301984190 0. 3.3 4507.80 5.  \$44507.08574..808  .80 .07.809072  \$ 5.3.5574.070.8809 -:939:739. .48 89.5574.930. 0.80840. 0.9 41 90 0399 8 13.08 .08009.3/70...943 43 -0.7./08:11.91.80/4:9.80 ..80  90 08847 825 70.80/ 5745079 8 89 4507.430/220/.80/.0/ 9.0 -09907 70.3...70 0.3 &3/07 90088478 -448 90:807.3 0.:041.7.80-..8809 \$ 5.9438 13.80 80028 94 .42089.07  13.0 574.3.     94:  9070 .3..4308 90 0..94305038043900.7-0/ .24790/4..3.97.3/ 0. -0. 0.9071:.38..8970.0888.07900.93 0.0 0..88098 . 474507.0888..5574.//943  90 08847  005 90 0.:80 43.930.1 41 90 08847 50    \$4 8420 8:7.3810770/ 1742 0884794 08800  &3/074507.3.902039 :8078  40.70 5708. 89.902039:807894570/..

8809.80 574..9438 -0.3/ .9:70 41 90 .80/5745079870.70 .9:3/0713.20398390.08009.:9320..80  900.70. 0.-9 .4224320.948 .80/ 5745079.020..    .3/110703.425.9.3  9 . 0.-908390-..4:393 /..8:708418.  25479.3 4907 7.3.8:730.-908 8 70/:. ..89:/087054799.8809823:8.70920.997.939008800 8:370.0 84473..8:708 ..089.70 97....94385 023     &3/07 13.80907054790//0-9 06:97.30     %4 8:2 :5  13.805.430/.039..90/ .80 2094/  .430/.3 8 13.07   \$0.4:39320.8.0 8009 13..7  \$3.:77039.808 .47/0/0.70 .3. 7..:80 90 4507.943 574.808 .89./8.80 4-.3.07.8 90 0.:08  43806:039 93.5574.84 1.93 0. ..9 90 ./0 088008 9 411 -..0.574.9430...902039:807894.:0410. 390770.8.8:7020398 %02..3/9814789..3.90/ - 2. -09907 5.0203994:804507..3 :74.3.70 970.3/.3.3.7.07 /1107039 /:0 94 /110703.843 2.4:/ -0 430 41 90 -089 20.4230.//0.948 .902039/.3/ 4507.. .3.0894705479 -099075071472.94 .94384113.70.3.8:7020398 9.808 50        :79072470  94 0.548943 ..:77039.381472.92.930.943825.3/.5574.0.84:/-07010.39 13.884.3.90/390 .3.80.88098.3.07.90 90 :801:3088 41 31472.91./0/ - 0..48:70706:702039814770547930399 :80788913//11.894-070..9.:.0/-905708039.93 0./024703.704/07 78.59.90/9904-.08 .8:70203941 47.9 ..3 /1107039 /0700 41 0110.

902039:8078                          #010703.3/ 4507.5.80 -09907 7010.-.98 90 .08009  3904907.94314713./08 2470 :801:31472.425.0  .8:70/.870.3 8 3..902039  8 90 .420 89.93 . 548943 .5574. 0.930..03:047050380  . 41 13. .3..3...808 20.3..3/ 1:9:70 4507.9 90 13.3..89.9  9 574.110.

4:393 #0.9.9./.0 ..3/ 90   574548.89.:9. :74.930.8-.       0.70.884:73...808 .0       023   48..0         \$3     .59.4:393 7080..83 .3.2       .../03..943  .4     0.02039       50  #     0... .43897:. 2.3..3     .902039 0.59.0 41 90 .7013.943 41 4507.3    #4303     \$47907      4 0.4:393 47438       \$3..0       3-072.3 .. 74:5 :897. 89.3..913...80 .:770397:08.7843 :897.1107 13.     ...4:393!07850.80.948 3.809508.3.       .9020398  .30    3440./.7.  .0.....3/ 13.9.3.4:393.3.3.80 .3. 3.4:393 .7.07  \$.3/-44     !0.88420 8.110.3.