You are the financial accountant of Denver plc (“Denver”).  Denver prepares its financial statements to 31 March each year and you are in the process of finalising the accounts to 31 March 2021.  You are provided with the following information:

1. Machine Lease

Denver leased a machine under a four-year lease agreement commencing on 1 April 2019. The machine has a purchase price of €50,000 and an estimated useful life of five years.  Under the terms of the lease, Denver is obliged to make four annual payments of €14,130 on 1 April each year.  Denver made the first payment on 1 April 2019. 

At the inception of the lease, Denver incurred initial direct costs of €20,000 and received lease incentives of €5,000 and the present value of the future lease payments (excluding the first payment on 1 April 2019) was calculated at €36,413.  The interest rate implicit in the lease is 8%.  There is no transfer of the asset at the end of the lease and no purchase option.

Denver has the right to determine the use of the asset during the lease term and will obtain substantially all the economic benefit.

REQUIRED:

1. Show, with appropriate calculations, the journal accounting entries required to record the lease transaction above for the year ended 31 March 2021.                    (9 marks)
2. Present relevant extracts from the Statement of Profit or Loss for the year ended 31 March 2021 and the Statement of Financial Position as at that date regarding the lease. (4 marks)
3. Laptop Lease

The Managing Director of Denver requires a new laptop.  Rather than purchase a new laptop at a cost of €2,600, Denver is considering leasing a laptop for €1,400 per annum over two years.

REQUIRED:

Explain briefly, in accordance with IFRS 16 Leases, how this lease would be treated in the financial statements of Denver.              (3 marks)

Answer rating: 100% (QA)

1 Machine Lease Journal Entries April 1 2019 Leased Asset 50000 Lease Incentives 5000 Initial Dire... View the full answer