Reference no: EM132621339
Melvic Ltd. has signed a contract to lease a store from Glen Caper Ltd. nearby for a non-cancellable period of three years. The arrangement also provides an option for Melvic Ltd. to renew the lease for a further two years at the same annual payment rate. Melvic Ltd. will make expensive modifications to the building at commencement of the lease and these modifications are expected to have a useful economic life of 7 years.
The terms of the lease relating to the building are as follows:-
Date of entering lease 1 July 2020
Duration of lease 3 years (plus option for further 2 years at the same rate)
Lease payments Initial payment of $40,000 plus half yearly
payments of $60,000 payable at 31 December and 30 June
Implicit interest rate 12%
Cost of initial modifications paid in
cash at commencement of lease $96,000
Economic Life of modifications 7 years with zero scrap value
Required:
For this lease:
Problem a) Discuss and determine if the contract between Melvic Ltd and Glen Caper Ltd. contains a lease. For the remaining sections of this question, assume that the contract contains a lease according to AASB16 Leases.
Problem b) calculate the lease liability and lease asset for Melvic Ltd.;
Problem c) prepare a full lease schedule for Melvic Ltd., showing the division of the lease rental into interest and principal components; and
Problem d) provide the journal entries for the lease transactions in the books of Melvic Ltd. for the financial year ending 30 June 2021 (include journal entries at the inception 1/7/2020). Also include all relevant transactions pertaining to the modifications for the year ending 30 June 2021.