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MGT401 Financial Accounting II Assignment 2 Solution Fall 2013

Learning Objective

This activity aims to develop among the students an understanding as how to organize the amortization schedule through lease rentals and their presentations along with the calculation of depreciation after revaluation and amount of unrealized surplus at the end of lease term as per IAS 16 and IAS 17.

Learning Outcomes

After going through this activity, the students would be able to analyze lease terms, preparing lease amortization schedule, and how to calculate the value of unrealized surplus at the end of lease term.

Case

Ralph Leasing enters into a non-cancelable lease contract on January 1st, 2001 with RP Company to supply highly sophisticated laboratory equipment on the following terms:

a)   The contract is for a lease term of 6 years with the immediate inception;

b)   Annual installment of Rs.124,798 is to be made on January 1st each year commencing from 2001:

c)   The asset will revert to the lessor at the end of the lease term.

d)   Residual value of the equipment at end of lease term has been guaranteed by the lessee at Rs.50, 000;

e)   The lessor’s implicit rate is 12 % for this type of lease; &

f)    The economic life of this leased equipment with fair value of Rs. 600,000 has been estimated at 6 years.

The lessee uses following accounting policy to treat this equipment is its books of accounts:

a)   Straight-line depreciation method with full year depreciation in the year of purchase and no depreciation in the year of sale;

b)   Useful life for all such equipment is estimated at  8  years;

In 2004, the equipment was revalued at Rs. 560,000 by an independent valuer. At the end of sixth year, the asset was disposed of at Rs. 350,000 due to some technical faults developed therein.

Required:

a)   Apply each test whether the lease is a financial lease or operating lease;

b)   Prepare a lease amortization schedule suitable for the lessee for the entire lease term;

c)   Amount of depreciation after revaluation; &

d)   Amount of unrealized surplus at the end of lease term.

(Hint: Test five conditions as per IAS 17 to declared a lease as finance lease)

Solution:

(a) financial lease useful life 8 years and lease 6 years is 75%

(b) Not sure see the handout and there r example to make scheduled for amortization

(c) Straight line method useful life 8 revalued amount 560000 and 50000 disposal amount

formula = amount of revalued asset – disposal amount/ life of assets.

year when asset revalued included in depreciation and year disposal not included depreciation so 2004, 2005,2006 for dprecaition.

(d) revaluation surplus = residual value of the asset – amount of disposal

 

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