Page 106 - FR Integrated Workbook 2018-19

Chapter 9

Example 1

Initial values
On 1 January 20X1, Dynamic entered into a two year lease for a lorry. The
contract contains an option to extend the lease term for a further year.
Dynamic believes that it is reasonably certain to exercise this option. Lorries
have a useful economic life of ten years.
Lease payments are $10,000 per year for the initial term and $15,000 per
year for the option period. All payments are due at the end of the year. To
obtain the lease, Dynamic incurred initial direct costs of $3,000. Dynamic’s
rate of borrowing is 5%.

Calculate the initial carrying amount of the lease liability and the right-
of-use asset and provide the double entries needed to record these
amounts in Dynamic's financial records.

The lease term is three years. This is because the option to extend the lease
is reasonably certain to be exercised.

The lease liability is calculated as follows:
Cash flow Discount Present value
Date $ rate $
31/12/X1 10,000 1/1.05 9,524

31/12/X2 10,000 1/1.05 2 9,070

31/12/X3 15,000 1/1.05 3 12,958
––––––

––––––
The initial cost of the right-of-use asset is calculated as follows:

$
Initial liability value 31,552

Direct costs 3,000
––––––

––––––

100