Reference no: EM132717971

Question: Lester entered into a ten-year lease of a floor of a building, with an option to extend for a further three years, on 1 July 2001. Lease payment are K50,000 per year in advance during the initial term and K55,000 per year during the optional period, all payable at The beginning of each year. The interest rate implicit in the lease was not readily determinable at the commencement of the lease; Lester's incremental borrowing rate at that date was 5% per annum. At this date, the management of Lester determined that the company was not reasonably certain to exercise the extension option. On 30 June 2007, Lester acquired Wester and determined that it required two floors in the same building suitable for the increased workforce of the combined companies as this will result in costsaving synergies. Wester had been leasing space in another building however on its acquisition, Wester exercised an option to terminate this lease. On the same date, Lester entered into an eight-year lease of another floor in the building it currently occupies. Lester's incremental borrowing rate at 30 June 2007 is 6% per annum. Explain the accounting treatment of the original lease entered into by Lester.