Melvic Ltd. has signed a contract to lease a store from Glen Caper Ltd. nearby for a non-cancel lable 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 the modification 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:

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.

b) calculate the lease liability and lease asset for Melvic Ltd.;

c) prepare a full lease schedule for Melvic Ltd., showing the division of the lease rental into interest and principal components;and

d) provide the journal entries for the lease transactions in the book sof 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.

Answer rating: 100% (QA)

a Non cancellable lease period 3 years Option for reneval for another 2 years So total lease term as 5 years Expenses on modification of lease assets ... View the full answer