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FAR-II Test IFRS-16 (AB)

This document contains two questions regarding accounting for leases under IFRS 16. Question 1 involves journal entries for a lease agreement between Ahmad Limited and Hassan Limited for the year ended 31 December 2017. Question 2 involves journal entries and notes for a finance lease between Superb Enterprises and Outstanding Limited for the year ended 31 December 2018. Question 3 has two parts, the first regarding the calculation of an amount to be charged to the statement of profit or loss for two lease transactions, and the second regarding conditions that would require a leased machine to be depreciated over its estimated life.

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71 views

FAR-II Test IFRS-16 (AB)

This document contains two questions regarding accounting for leases under IFRS 16. Question 1 involves journal entries for a lease agreement between Ahmad Limited and Hassan Limited for the year ended 31 December 2017. Question 2 involves journal entries and notes for a finance lease between Superb Enterprises and Outstanding Limited for the year ended 31 December 2018. Question 3 has two parts, the first regarding the calculation of an amount to be charged to the statement of profit or loss for two lease transactions, and the second regarding conditions that would require a leased machine to be depreciated over its estimated life.

Uploaded by

Waseim khan Barik zai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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THE PROFESSIONALS’ ACADEMY OF COMMERCE

Total Marks: 22 Financial Accounting & Reporting-II Section: A&B


Time Allowed: 40 Minutes IFRS-16 Lease SP - 2021

Question 1
On 1 January 2017, Ahmad Limited (AL) purchased a machine costing Rs. 300 million having
useful life of 10 years. Residual value of the machine at end of its useful life is estimated at Rs.
20 million.

On 1 March 2017, AL entered into a lease agreement for this machine with Hassan Limited (HL)
for a non-cancellable period of 3.5 years with effect from 1 April 2017. Under the agreement,
five installments of Rs. 14 million are to be paid semi-annually in arrears commencing from the
30 September 2018.

AL has incorporated an implicit rate of 15% per annum.

AL follows straight line method for charging depreciation.

Required:
Prepare journal entries for the year ended 31 December 2017 in the books of AL (4)

Question 2

Superb Enterprises (SE) a manufacturer sold equipment to Outstanding Limited (OL) on finance
lease of four years on January 1, 2018. SE also deals in used equipment; therefore OL will
return equipment at end of lease term to SE as per agreement. SE had purchased this
equipment for Rs.1 million. It sells such equipment to cash customers as well at a profit markup
of 20%. Lease terms as agreed between SE and OL were as follows:

i. Lease term (extendable for one more year): 4 years


ii. Down payment: Rs. 20, 000
iii. Installment payable on every December 31st: Rs.340,889
iv. Residual value guaranteed by OL if:
• Lease term is 4 years: Rs.370,000
• Lease term is 5 years: Rs.50,000
v. Implicit rate 15%

SE pays 1% commission to sales staff at the time of sale for all sales whether on cash or lease.
Residual value of the equipment is expected to be 15% of cost after four years and 7.5% of cost
after five years of sale.

Required:
Assuming that both parties have shown intention to extend lease term
• Journal entries for the year ended December 31, 2018 in books of SE,
• Note on lease receivable for inclusion in financial statements of SE for the year ending
December 31, 2018. (15)
Question 3

i. During the year ended 30 September 2014 an entity entered into two lease transactions.
On 1 October 2013, the entity made a payment of Rs. 900,000 being the first of five equal
annual payments under a lease for an item of plant. The lease has an implicit interest rate
of 10% and the present value of the total lease payments on 1 October 2013 was Rs.
3,752,879.
On 1 January 2014, the entity made a payment of Rs. 180,000 for a one-year lease of an
item of equipment.
What amount in total would be charged to entity’s statement of profit or loss for the year
ended 30 September 2014 in respect of the above transactions?

(a) Rs. 1,080,000


(b) Rs. 1,110,864
(c) Rs. 1,170,864
(d) Rs. 1,155,000 (2)

ii. On 1 April 2017 Pink Limited (PL) entered into a five-year lease agreement for a
machine with an estimated life of 7 years. Which of the following conditions would
require the machine to be depreciated over 7 years?

(a) PL has the option to extend the lease for two years at a market-rate rental
(b) PL has the option to purchase the asset at market value at the end of the lease
(c) Ownership of the asset passes to PL at the end of the lease period
(d) PL’s policy for purchased assets is to depreciate over 7 years (1)

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