On 1 July 20x2 AGL’s Manufacturing Division entered into a contract with a finance company to sell a building at Sungei Kadut. The carrying value of the building of $19 m was sold for $22.5 m. The building was leased back from the finance company to be one of its operating offices for a period of 40 years, which was equal to the building's remaining useful life. AGL may use the property as it so wishes during the lease term and must ensure proper up keeping and maintenance. The lease rentals for the lease period are $1.1 m payable annually in arrears and the interest rate implicit in the lease is 3.8% per annum. The present value of the lease payments approximates to the fair value of the building. The land element of the lease is ignored as it is considered not material.

Required:

Apply FRS 116 Leases and explain the accounting treatment applicable to the sale of the building at Sungei Kadut. 

Compute and prepare the required journal entries in the year ended 30 June 20x3. Narrations are not required.

Answer rating: 100% (QA)

Under FRS 116 Leases a sale and leaseback transaction is treated as a finance lease if the transfer ... View the full answer