Page 103 - SBR Integrated Workbook STUDENT S18-J19
P. 103
Leases
Example 2
Lessee accounting – initial treatment
On 1 January 20X1, Oryx entered into a contract to lease a specialised
machine for three years. The contract contains an option to extend the lease
term for a further year. Oryx believes that it is reasonably certain to exercise
this option. The machine has a useful life of ten years.
Oryx will make lease payments of $1 million per year for the initial term and
$0.8 million per year for the option period. All payments are due at the end of
the year. To obtain the lease, Oryx incurs initial direct costs of $0.1 million.
The interest rate within the lease is not readily determinable. Oryx’s
incremental rate of borrowing is 10%.
What entries will Oryx post on 1 January 20X1 in respect of this lease?
97
