GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

7.2 Lease payment schedule and journal entries (1 Page only)

INTERMEDIATE 20 marks: 30 minutes

On 1 April 20.4, Tex Limited signed a five-year, non-cancelable lease with Bar Limited. The leased
equipment was designed to meet the unique needs of Tex Limited. Annual rent of R10 000 is
payable in advance, starting on 1 April 20.4. The lease contract gave the lessee an option to purchase
the equipment on 31 March 20.9 for R1 (a).

The estimated useful life of the equipment is 10 years, and management of Tex Limited estimated that
the residual value of the equipment at the end of its useful life will be nil. Tex Limited uses the
straight-line method of depreciation, and its financial year ends on 31 March.

The incremental borrowing rate of Tex Limited on 1 April 20.4 is 10% a year. The present value of
an annuity due of five advance annual payments of R1 at 10% is 4,1698.

Ignore all forms of taxation.

Present value factor of an amount/or annuity of R1 (in arrears) at an interest rate of 10%:

Year Amount Annuity

of R1 of R1

1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4868
4 0.6830 3.1698
5 0.6209 3.7907

Required:
(a) Prepare a summary of lease payments and the lessee's interest expense for the lease described
above in an amortisation table.

(b) Prepare journal entries for Tex Limited (the lessee) relating to the lease for the financial year
ended 31 March 20.5, to comply with IFRS 16 Leases.

NOTE: (a) Treat as immaterial.

Chapter 7: Lessees
© Stainbank, Razak and Jankeeparsad
 GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

SUGGESTED SOLUTION – 7.2 (1 Page only)

(a) A summary of lease payments and lessee's interest expense:

Interest Repayment Balance

1.4.20.4 Capital amount 41 698 (a)
1.4.20.4 Cash (10 000) 31 698
31.3.20.5 Interest 3 170 34 868
1.4.20.5 Cash (10 000) 24 868
31.3.20.6 Interest 2 487 27 355
1.4.20.6 Cash (10 000) 17 355
31.3.20.7 Interest 1 736 19 091
1.4.20.7 Cash (10 000) 9 091
31.3.20.8 909 10 000
1.4.20.8 (10 000) -

(a) (10 000 x 4,1698)

(b) Journal entries for Tex Limited

Calculations: Debit Credit
20.4 Rand Rand
Right-of use asset 41 698
Lease liability i.e. PV of lease 31 698
payments not paid
Bank 10 000
1 April 20.4: Acquisition of equipment under lease

Lease liability 10 000

Cash 10 000
1 April 20.4: Lease rental for 20.4

20.5
Interest expense 10% x 31 699 3 170
Lease liability 3 170
31 March 20.5: Interest for first year

Depreciation expense 41 698/10 years 4 170

Accumulated depreciation: ROU asset 4 170
31 March 20.5: Depreciation for first year

Chapter 7: Lessees
© Stainbank, Razak and Jankeeparsad