- Explain how a 'finance' and 'operating' lease differ
- Explain management incentives to avoid classification as a finance lease
- Describe the lease issues covered in the Australian Interpretations
- Demonstrate how a lessee accounts for a finance lease
- Demonstrate how a lessee accounts for an operating lease
- Outline the note disclosures required of a lessee for finance and operating leases
- Demonstrate how a lessor that is a non-manufacturer or nondealer accounts for a finance lease
- Demonstrate how a lessor that is a manufacturer or dealer accounts for a finance lease
- Demonstrate how a lessor accounts for an operating lease
- Outline the note disclosures required of a lessor for leases
- Describe the accounting issue associated with a noncancellable operating lease
- Demonstrate how to account for a sale and leaseback transaction
- Summarise the proposed changes to lease accounting that are being considered by the standard setters
|
In the Books ChiHerbal Ltd. |
||||
|
Jornal Entries |
||||
|
|
|
|
Dr. |
Cr. |
|
Date |
Particulars |
Amount |
Amount |
|
|
15/10/2014 |
Bank A/c. |
Dr. |
$1,500,000 |
|
|
|
To, |
Share Application A/c. |
|
$1,500,000 |
|
|
(Being share application money received for 600000 shares) |
|
|
|
|
|
Share Application A/c. |
Dr. |
$1,000,000 |
|
|
|
To, |
Share Capital A/c. |
|
$1,000,000 |
|
|
(Being application fund transferred to Share Capital A/c. for 500000 shares) |
|
|
|
|
16/10/2014 |
Share Application A/c. |
Dr. |
$200,000 |
|
|
|
To, |
Bank A/c. |
|
$200,000 |
|
|
(Being excess share application money refunded) |
|
|
|
|
30/10/2014 |
Share Issuance Cost A/c. |
Dr. |
$8,000 |
|
|
|
To, |
Bank A/c. |
|
$8,000 |
|
|
(Being cost of share issue paid) |
|
|
|
|
15/11/2014 |
Share Allotment A/c. |
Dr. |
$1,000,000 |
|
|
|
To, |
Share Capital A/c. |
|
$1,000,000 |
|
|
(Being share allotment due) |
|
|
|
|
15/11/2014 |
Bank A/c. |
Dr. |
$800,000 |
|
|
|
Share Application A/c. |
Dr. |
$200,000 |
|
|
|
To, |
Share Allotment A/c. |
|
$1,000,000 |
|
|
(Being due allotment money received and balance adjusted from the excess appliation fund) |
|
|
|
|
1/12/2014 |
Share Final Call A/c. |
Dr. |
$500,000 |
|
|
|
To, |
Share Capital A/c. |
|
$500,000 |
|
|
(Being final call money due) |
|
|
|
|
15/12/2014 |
Bank A/c. |
Dr. |
$380,000 |
|
|
|
Calls-in-Arear A/c. |
Dr. |
$20,000 |
|
|
|
Share Application A/c. |
Dr. |
$100,000 |
|
|
|
To, |
Share Final Call A/c. |
|
$500,000 |
|
|
(Being due final call money received, except 20000 shares, and balance adjusted from excess application fund) |
|
|
|
|
22/12/2014 |
Share Capital A/c. |
Dr. |
$100,000 |
|
|
|
To, |
Calls-in-Arear A/c. |
|
$20,000 |
|
|
To, |
Forfeited Share Liability A/c. |
|
$80,000 |
|
|
(Being the 20000 shares forfeited accordingly) |
|
|
|
|
|
Forfeited Share Liability A/c. |
Dr. |
$80,000 |
|
|
|
To, |
Bank A/c. |
|
$80,000 |
|
|
(Being the application and allotment money received from forfeited shares refunded) |
|
|
|
|
BALANCE SHEET |
||
|
as on 30/06/2015 |
||
|
Particulars |
Amount |
Amount |
|
Shareholders' Equity: |
|
|
|
Authorised Equity Shares - 500,000 shares @ $5 per share |
|
$2,500,000 |
|
Issued & Outstanding Equity Shares - 480,000 shares @ $5 per share |
|
$2,400,000 |
|
Total Equity Capital |
|
$2,400,000 |
|
In the books of ChiHerbal Ltd. |
||||
|
Journal Entries |
||||
|
|
|
|
Dr. |
Cr. |
|
Date |
Particulars |
Amount |
Amount |
|
|
31/12/2015 |
Depreciation Expenses A/c. |
|
$26,000 |
|
|
|
|
Accumulated Depreciation- Machine A A/c. |
|
$15,500 |
|
|
|
Accumulated Depreciation- Machine B A/c. |
|
$10,500 |
|
|
(Being depreciation charged for 6 months on Machine A and Machine B) |
|
|
|
|
|
Accumulated Depreciation- Machine A A/c. |
|
$135,500 |
|
|
|
|
Machine A A/c. |
|
$120,000 |
|
|
|
Gain on Revaluation A/C. |
|
$15,500 |
|
|
(Being gain on revaluation recorded for Machine A) |
|
|
|
|
|
Accumulated Depreciation- Machine B A/c. |
|
$40,500 |
|
|
|
Loss on Devaluation A/c. |
|
$4,500 |
|
|
|
|
Machine B A/c. |
|
$45,000 |
|
|
(Being loss on devaluation recorded for Machine B) |
|
|
|
|
|
Gain on Revaluation A/C. |
|
$15,500 |
|
|
|
|
Asset Revaluation Reserve A/c. |
|
$15,500 |
|
|
(Being gain on revaluation transferred to Assets Revaluation Reserve A/c.) |
|
|
|
|
|
Asset Revaluation Reserve A/c. |
|
$4,500 |
|
|
|
|
Loss on Devaluation A/c. |
|
$4,500 |
|
|
(Being loss on devaluation transferred to Assets Revaluation Reserve A/c.) |
|
|
|
|
30/06/2016 |
Depreciation Expenses A/c. |
|
$32,333 |
|
|
|
|
Machine A A/c. |
|
$15,833 |
|
|
|
Machine B A/c. |
|
$16,500 |
|
|
(Being depreciation charged on Machine A and Machine B) |
|
|
|
|
|
Loss on Devaluation A/c. |
|
$3,167 |
|
|
|
|
Machine A A/c. |
|
$1,167 |
|
|
|
Machine B A/c. |
|
$2,000 |
|
|
(Being loss on devaluation of machine A & B recorded) |
|
|
|
|
|
Asset Revaluation Reserve A/c. |
|
$3,167 |
|
|
|
|
Loss on Devaluation A/c. |
|
$3,167 |
|
|
(Being loss on devaluation transferred to Assets Revaluation Reserve A/c.) |
|
|
|
Workings:
|
Computation of Accummulated Depreciation: |
|||
|
Particulars |
|
Machine A |
Machine B |
|
Cost of Machine |
A |
$310,000 |
$210,000 |
|
Expected Life (in years) |
B |
10 |
10 |
|
Depreciation p.a. |
C=A/B |
$31,000 |
$21,000 |
|
Carrying Amount |
D |
$190,000 |
$180,000 |
|
Accumulated Depreciation |
E=A-D |
$120,000 |
$30,000 |
|
Depreciation Schedule for Machine A: |
||||||||
|
Date |
Carrying Amount |
Useful Life |
Depreciation p.a. |
Depreciation Period |
Depreciation charged |
Depreciated Value |
Fair Value |
Revaluation |
|
|
A |
B |
C=A/B |
D |
E=CxD |
F=A-C |
G |
H=G-F |
|
31/12/2015 |
$190,000 |
10 |
$31,000 |
0.5 |
$15,500 |
$174,500 |
$190,000 |
$15,500 |
|
30/06/2016 |
$190,000 |
6 |
$31,667 |
0.5 |
$15,833 |
$174,167 |
$173,000 |
-$1,167 |
|
Depreciation Schedule for Machine B: |
||||||||
|
Date |
Carrying Amount |
Useful Life |
Depreciation p.a. |
Depreciation Period |
Depreciation charged |
Depreciated Value |
Fair Value |
Revaluation |
|
|
A |
B |
C=A/B |
D |
E=CxD |
F=A-C |
G |
H=G-F |
|
31/12/2015 |
$180,000 |
10 |
$21,000 |
0.50 |
$10,500 |
$169,500 |
$165,000 |
-$4,500 |
|
30/06/2016 |
$165,000 |
5 |
$33,000 |
0.50 |
$16,500 |
$148,500 |
$146,500 |
-$2,000 |
|
Proof of Implicit Rate: |
||
|
Particulars |
|
Amount |
|
Annual Installment |
A |
$66,000 |
|
Less: Annual Insurance &Maintanence Cost |
B |
$6,000 |
|
Net Installment |
C=A-B |
$60,000 |
|
No. of Annual Installment |
D |
4 |
|
Required Rate of Return |
E |
12% |
|
Present Value of Lease Liability |
F |
$182,241 |
|
PV of 1st Installment |
G=[1/(1+E)^1]xC |
$53,571 |
|
PV of 2nd Installment |
H=[1/(1+E)^2]xC |
$47,832 |
|
PV of 3rd Installment |
I=[1/(1+E)^3]xC |
$42,707 |
|
PV of 4th Installment |
J=[1/(1+E)^4]xC |
$38,131 |
|
Total PV of Installment |
K=G+H+I+J |
$182,241 |
|
Schedule of Lease Payment: |
|||||
|
|
|
|
|
|
|
|
Year |
Lease Liability |
Annual Repayment |
Interest Rate |
Interest Expense |
Balance Liability |
|
1 |
$182,240.96 |
$60,000.00 |
12.00% |
$21,868.92 |
$144,109.88 |
|
2 |
$144,109.88 |
$60,000.00 |
12.00% |
$17,293.19 |
$101,403.06 |
|
3 |
$101,403.06 |
$60,000.00 |
12.00% |
$12,168.37 |
$53,571.43 |
|
4 |
$53,571.43 |
$60,000.00 |
12.00% |
$6,428.57 |
$0.00 |
|
In the books of ChiHerbal Ltd. |
||||
|
Journal Entries |
||||
|
|
|
|
Dr. |
Cr. |
|
Date |
Particulars |
Amount |
Amount |
|
|
1/7/2015 |
Lease Assets A/c. |
|
$210,000.00 |
|
|
|
|
Lease Liability A/c. |
|
$210,000.00 |
|
|
(Being asset required from lease) |
|
|
|
|
30/06/2016 |
Interest on Lease A/c. |
|
$21,868.92 |
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
|
Interest Payable A/c. |
|
$21,868.92 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
(Being annual interest on lease and insurance & maintenance charges due) |
|
|
|
|
|
Depreciation on Leased Assets A/c. |
|
$48,750.00 |
|
|
|
|
Accum. Depreciation A/c. |
|
$48,750.00 |
|
|
(Being depreciation charged on leased asset) |
|
|
|
|
1/7/2016 |
Interest Payable A/c. |
|
$21,868.92 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
|
Lease Liability A/c. |
|
$38,131.08 |
|
|
|
|
Cash A/c. |
|
$66,000.00 |
|
|
(Being annual lease payment paid including interest on lease, insurance & maintenance charges and partly lease principal) |
|
|
|
|
30/06/2017 |
Interest on Lease A/c. |
|
$17,293.19 |
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
|
Interest Payable A/c. |
|
$17,293.19 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
(Being annual interest on lease and insurance & maintenance charges due) |
|
|
|
|
|
Depreciation on Leased Assets A/c. |
|
$48,750.00 |
|
|
|
|
Accum. Depreciation A/c. |
|
$48,750.00 |
|
|
(Being depreciation charged on leased asset) |
|
|
|
|
1/7/2017 |
Interest Payable A/c. |
|
$17,293.19 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
|
Lease Liability A/c. |
|
$42,706.81 |
|
|
|
|
Cash A/c. |
|
$66,000.00 |
|
|
(Being annual lease payment paid including interest on lease, insurance & maintenance charges and partly lease principal) |
|
|
|
|
30/06/2018 |
Interest on Lease A/c. |
|
$12,168.37 |
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
|
Interest Payable A/c. |
|
$12,168.37 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
(Being annual interest on lease and insurance & maintenance charges due) |
|
|
|
|
|
Depreciation on Leased Assets A/c. |
|
$48,750.00 |
|
|
|
|
Accum. Depreciation A/c. |
|
$48,750.00 |
|
|
(Being depreciation charged on leased asset) |
|
|
|
|
1/7/2018 |
Interest Payable A/c. |
|
$12,168.37 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
|
Lease Liability A/c. |
|
$47,831.63 |
|
|
|
|
Cash A/c. |
|
$66,000.00 |
|
|
(Being annual lease payment paid including interest on lease, insurance & maintenance charges and partly lease principal) |
|
|
|
|
30/06/2019 |
Interest on Lease A/c. |
|
$6,428.57 |
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
|
Interest Payable A/c. |
|
$6,428.57 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
(Being annual interest on lease and insurance & maintenance charges due) |
|
|
|
|
|
Depreciation on Leased Assets A/c. |
|
$48,750.00 |
|
|
|
|
Accum. Depreciation A/c. |
|
$48,750.00 |
|
|
(Being depreciation charged on leased asset) |
|
|
|
|
1/7/2016 |
Interest Payable A/c. |
|
$6,428.57 |
|
|
|
Accrued Expenses A/c. |
|
$6,000.00 |
|
|
|
Lease Liability A/c. |
|
$53,571.43 |
|
|
|
|
Cash A/c. |
|
$66,000.00 |
|
|
(Being annual lease payment paid including interest on lease, insurance & maintenance charges and partly lease principal) |
|
|
|
|
|
Lease Obligation A/c. |
|
$2,500.00 |
|
|
|
|
Cash A/c. |
|
$2,500.00 |
|
|
(Being lease obligation paid for the shortfall between the residual price and selling price) |
|
|
|
|
Schedule of Lease Receipt: |
|||||
|
Year |
Leased Assets |
Annual Receipts |
Interest Rate |
Interest Income |
Asset Balance |
|
1 |
$182,240.96 |
$60,000.00 |
12.00% |
$21,868.92 |
$144,109.88 |
|
2 |
$144,109.88 |
$60,000.00 |
12.00% |
$17,293.19 |
$101,403.06 |
|
3 |
$101,403.06 |
$60,000.00 |
12.00% |
$12,168.37 |
$53,571.43 |
|
4 |
$53,571.43 |
$60,000.00 |
12.00% |
$6,428.57 |
$0.00 |
|
In the books of Darlington Ltd. |
||||
|
Journal Entries |
||||
|
|
|
|
Dr. |
Cr. |
|
Date |
Particulars |
Amount |
Amount |
|
|
1/7/2015 |
Lease Receivables A/c. |
|
$210,000.00 |
|
|
|
|
Assets A/c. |
|
$210,000.00 |
|
|
(Being asset given in lease) |
|
|
|
|
|
Lease Expenses A/c. |
|
$3,643.00 |
|
|
|
|
Cash A/c. |
|
$3,643.00 |
|
|
(Being expenses paid for lease agreement) |
|
|
|
|
30/06/2016 |
Interest Receivables A/c. |
|
$21,868.92 |
|
|
|
Lease Receivables A/c. |
|
$6,000.00 |
|
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
Interest Income A/c. |
|
$21,868.92 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount due) |
|
|
|
|
1/7/2016 |
Cash A/c. |
|
$66,000.00 |
|
|
|
|
Interest Receivables A/c. |
|
$21,868.92 |
|
|
|
Lease Receivables A/c. |
|
$44,131.08 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount received) |
|
|
|
|
30/06/2017 |
Interest Receivables A/c. |
|
$17,293.19 |
|
|
|
Lease Receivables A/c. |
|
$6,000.00 |
|
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
Interest Income A/c. |
|
$17,293.19 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount due) |
|
|
|
|
1/7/2017 |
Cash A/c. |
|
$66,000.00 |
|
|
|
|
Interest Receivables A/c. |
|
$17,293.19 |
|
|
|
Lease Receivables A/c. |
|
$48,706.81 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount received) |
|
|
|
|
30/06/2018 |
Interest Receivables A/c. |
|
$12,168.37 |
|
|
|
Lease Receivables A/c. |
|
$6,000.00 |
|
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
Interest Income A/c. |
|
$12,168.37 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount due) |
|
|
|
|
1/7/2018 |
Cash A/c. |
|
$66,000.00 |
|
|
|
|
Interest Receivables A/c. |
|
$12,168.37 |
|
|
|
Lease Receivables A/c. |
|
$53,831.63 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount received) |
|
|
|
|
30/06/2019 |
Interest Receivables A/c. |
|
$6,428.57 |
|
|
|
Lease Receivables A/c. |
|
$6,000.00 |
|
|
|
|
Insurance & Maintenance Charges A/c. |
|
$6,000.00 |
|
|
|
Interest Income A/c. |
|
$6,428.57 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount due) |
|
|
|
|
1/7/2019 |
Cash A/c. |
|
$66,000.00 |
|
|
|
|
Interest Receivables A/c. |
|
$6,428.57 |
|
|
|
Lease Receivables A/c. |
|
$59,571.43 |
|
|
(Being annual interest on lease, insurance & maintenance charges for the asset and the part principal amount received) |
|
|
|
|
|
Cash A/c. |
|
$2,500.00 |
|
|
|
|
Lease Obligation Ac. |
|
$2,500.00 |
|
|
(Being the shortfall between the residual value and selling price of the asset received from lessee) |
|
|
|
|
|
Cash A/c. |
|
$10,000.00 |
|
|
|
Loss on Sale of Assets A/c. |
|
$2,500.00 |
|
|
|
Lease Obligation A/c. |
|
$2,500.00 |
|
|
|
|
Assets A/c. |
|
$15,000.00 |
|
|
(Being the assets sold at loss) |
|
|
|
According to the paragraph 54 of AASB 138, if the research & development activity does not ensure any future economic benefit, expenditure on such activities should be considered as expense rather than asset. The research activities of ChiHerbal in the year 2013 did not provide any specific chemical, which could be used for synthesizing the product. Hence, it should also be treated as expenses.
In the year 2014, the research & development activity had successfully identified the three chemicals, required for the main product. Hence, as the explanation, stated in the paragraph 57 of AASB 138, the activity can be included in development phase and the cost incurred for the activity should be treated as intangible asset. In 2015, the company had developed the formula of the final product from the selected three chemicals through further research. Hence, the cost, incurred for conducting the research, should be considered as the cost of internally generated intangible asset as per the paragraph 65 of AASB 138. Paragraph 57 of AASB 138 takes into account development phase of an internal project undertaken by organization. As per this paragraph, if the organization or entity is able to demonstrate the following six categories, then they can recognize the intangible assets generated from development of any internal project.
- It should take into consideration the intention of organization to widespread the intangible assets whether they intend to sell it or use it for business purpose.
- Availability of intangible assets for its sale and usage in business purpose by considering the technical feasibility. In this regard, technical feasibility relates to completing the intangible assets.
- Another category is to consider the ability of organization to use or sell the intangible assets.
- In order to complete the development phase of internal project or to make use or sell the intangible assets, it is required to consider availability of sufficient financial, technical and other resources.
- During the development phase, it is required to consider organization’s ability to reliably measure the expenditures that is associated with intangible assets.
- Last category should consider the generation of feasible future economic benefits by intangible assets. Considering other things involves demonstration of market by organization for output produced by intangible assets. This includes intangible assets usefulness or it can be used internally that is for internal projects or considering intangible assets itself.
The probable future economic benefits generated by intangible assets are identified by entity because research phase is less advanced that development phase.
The journal entries for the stated transactions are given below:
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In the books of ChiHerbal Ltd. |
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|
Journal Entries |
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|
|
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Dr. |
Cr. |
|
Date |
Particulars |
Amount |
Amount |
|
|
|
|
|
|
|
|
30/06/2014 |
Research & Development Expenses A/c. |
|
$1,000,000 |
|
|
|
|
Cash A/c. |
|
$1,000,000 |
|
|
(Being the expenses for research & development paid) |
|
|
|
|
|
Profit & Loss A/c. |
|
$1,000,000 |
|
|
|
|
Research & Development Expenses A/c. |
|
$1,000,000 |
|
|
(Being research & development expenses transferred to P/L A/c.) |
|
|
|
|
30/6/2015 |
Research & Development Expenses A/c. |
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$2,000,000 |
|
|
|
|
Cash A/c. |
|
$2,000,000 |
|
|
(Being the expenses for research & development paid) |
|
|
|
|
|
Patent A/c. |
|
$2,000,000 |
|
|
|
|
Research & Development Expenses A/c. |
|
$2,000,000 |
|
|
(Being patent devloped from the research & development internally) |
|
|
|
|
30/06/2016 |
Research & Development Expenses A/c. |
|
$3,000,000 |
|
|
|
|
Cash A/c. |
|
$3,000,000 |
|
|
(Being the expenses for research & development paid) |
|
|
|
|
|
Patent A/c. |
|
$3,000,000 |
|
|
|
|
Research & Development Expenses A/c. |
|
$3,000,000 |
|
|
(Being patent devloped from the research & development internally) |
|
|
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Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning
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