AC2101 S1 202223 Project #3Leases

School: Nanyang Technological University - Course: ACC 2101 - Subject: Accounting

Nanyang Technological University Nanyang Business School AC2101 - Accounting Recognition and Measurement Semester 1, 2022-23 Presentation Question - Project Team 3 For each of the following parts, the group is required to show workings clearly, where applicable, in their presentation. When using animations in your presentations, please make sure the answers are not "hidden by the animations" when printed out as hardcopies. Please ensure academic integrity and cite sources of information, where necessary. These instructions are applicable to ALL group presentations throughout the semester. PART I Explain clearly with supporting reasonswhyeachof the following statements isTRUEor FALSE. (1) If the lessor requires the lessee to guarantee a residual value of the leased asset at the end of the lease, it would imply that there is no unguaranteed residual value for the lessor at the end of the lease. (2)Company A leases a property from Company B. It then sub-leases the property to Company C under an operating lease. Company A can classify this leased property as investment property in its statement of financial position. (3) According to SFRS(I) 16, the lessee's incremental borrowing rate of interest is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. (4)A lessee applying SFRS(I) 16 for the first time need not carry out an impairment review of leases or assess whether the lease contract is onerous. PART II On 1 January 20x1, Barry Best Leasing ("BB") leases a machine with a total economic life of 8 years and a fair value of $72,000 to Clever Carriers ("CC") for 4 years for annual lease payments of $16,000 paid in arrears. The lease allows CC to renew the lease at the end of 4 years for another 2 years at $16,000 per year. At the inception of the lease, BB concludes that it is not reasonably certain that CC will exercise the renewal option. CC provides a guarantee that the residual value of the machine will be at least $30,000 at the end of the lease term, which approximates BB's estimated residual value. Both companies have a 31 December fiscal year end. Required

2(a)Determine the implicit interest rate for the lease. (b)Determine if BB should record the lease as an operating or finance lease. Give a brief reason to support your answer. (c)Prepare the relevant journal entries to be recorded by BB on 1 January 20x1, 31 December 20x1, and 31 December 20x2. (d) Assume that BB incurs $8,000 as initial direct costs while drawing up the lease arrangement. Consider the following two alternative scenarios separately and prepare the relevant journal entries to be recorded by BB on 1 January 20x1 independently. (1) BB wants to maintain the original implicit interest rate (i.e., rate of return) calculated in part (a). (2) BB wants to charge annual lease payments of $16,000 (i.e., the same annual lease payments as in the original scenario).