Question - The chief operations officer (COO) of Frozen Ltd plans to lease refrigerated trucks from CoolTrucks Ltd. CoolTrucks offers to enter into a non-cancellable lease agreement starting on 30/6/2017.
The following are the provisions of the lease agreement:
- The fair value of the office furniture equipment is $94,907 at 30 June 2017.
- The present value of the minimum lease payments is: $94,626.
- The lease term is for 5 years and the economic life of the vehicle is 6 years.
- The annual lease payments are made in advance with $23,000 due immediately and annual payments of $23,000 on 30 June 2018, 2019, 2020 and 2021.
- Annual executory costs borne by Frozen Ltd amount to $3,000.
- The contract specifies that Frozen Ltd will have to guarantee 95% of the residual value of $7,500 at the end of the lease term on 30 June 2022. The estimated residual value at the end of the asset's useful life is $6,000.
- The COO of Frozen Ltd does not expect that the trucks will be needed after the lease term expires.
- The interest rate implicit in the lease is 6%.
Required:
i. The COO asks you to determine whether this agreement is considered to be a lease under AASB 16.
ii. Prove that the interest rate implicit in the lease is 6% and explain the purpose of the implicit interest rate to the COO.
iii. Prepare a schedule of the lease payments to be made by Frozen Ltd for the duration of the lease.
iv. Journalize the transactions for the first year (up until 30 June 2018) to demonstrate to the COO how the financial statements of Frozen are affected by the lease. Discuss the differences in the financial statement effect if the lease was recorded as operation lease under the old standard (AASB 117).