Boomerang Builders Pty Ltd leased excavating equipment from Burning Spears Hire on the following terms: 

Commencement date

1st January 20X6:

Lease term : 3 years

Annual lease payments, commencing 1st January 20X9:

$150,000 including a projected CPI increase

Interest rate implicit in the lease :7%

The present value of the lease payments not yet paid to Burning Spears Hire at 1st January 20X6 was $370,000.

The price to purchase the asset outright (i.e. fully) from Burning Spears Hire would have been $780,000.

Inflation measured by the Consumer Price Index (CPI) for the calendar year ending 31st December 20X6 was 3%.  As a result, the lease payments commencing 1st January 20X7 rose to $154,500.

Required

a) Calculate the present value of the lease payments for the remaining 2 years (20X7 and 20X8), using the original discount rate of 7%.

b) How Boomerang Builders Pty Ltd should account for the lease and remeasurement in the financial year ending 30th June 20X8.

Answer rating: 100% (QA)

a Given informationLease term 3 yearsAnnual lease payments commencing 1st January 20X9 150000 including a projected CPI increaseInterest rate implicit ... View the full answer