Financial accounting and reporting II

6 OBJECTIVE BASED ANSWERS

01. (c) Depreciation of leased plant Rs. 750,576 (Rs. 3,752,879/5 years)
Finance cost Rs. 285,288 ((Rs.3,752,879 – 900,000) × 10%)
Rental of equipment (short term lease) Rs. 135,000 (180,000 × 9/12)
Total Rs. 1,170,864

02. (b) Balance at Interest Principal Balance at

Time Rental
beginning @ 7% Element end

Rupees

31.10.2013 450,000 31,500 109,750 (78,250) 371,750

31.10.2014 371,750 26,023 109,750 (83,727) 288,023

03. (d) Assets permitted to be exempted from recognition are low-value assets and those
with a lease term of 12 months or less. The use of the asset is irrelevant, and,
although IFRS 16 Leases does not define low-value, it is the cost when new that is
considered rather than current fair value.

04. (a)
ime Opening Payment Subtotal Interest 8% Closing

Rupees

2013 8,624,000 (2,000,000) 6,624,000 529,920 7,153,920

2014 7,153,920 (2,000,000) 5,153,920 412,314 5,566,234

2015 5,566,234 (2,000,000) 3,566,234

05. (c) The transfer of ownership at the end of the lease indicates that PL will have use of
the asset for its entire life, and therefore 7 years is the appropriate depreciation
period. Potential transactions at market rate would be ignored as they do not confer
any benefit on PL, and PL’s depreciation policy for purchased assets is irrelevant.

06. (a) Reverse incorrect treatment of rental:

Dr Liability Rs. 210,000
Cr Retained Earnings Rs. 210,000
Charge asset depreciation (Rs. 635,000/5):
Dr Retained earnings Rs. 127,000
Cr Property, plant and equipment Rs. 127,000
Charge finance cost (Rs. 635,000 × 12.2%):
Dr Retained Earnings Rs. 77,470
Cr Liability Rs. 77,470
This gives a net adjustment of Rs. 5,530 to be credited to opening retained
earnings.

© Emile Woolf International 610 The Institute of Chartered Accountants of Pakistan

 Chapter 13: IFRS 16: Leases

07. (b) Balance at Interest Principal Balance at

Time Rental
beginning @ 10% Element end

T Rupees

30.09.14 23,000,000 2,300,000 6,000,000 (3,700,000) 19,300,000

30.09.15 19,300,000 1,930,000 6,000,000 (4,070,000)

08. (d) The value recognised in respect of the lease payments will be the present value of
future lease payments rather than the total value.

09. (c) Assets permitted to be exempted from recognition are low-value assets and those
with a lease term of 12 months or less. Although IFRS 16 Leases does not define
low-value but it lists examples which includes telephones and small items of
furniture. Low value is based on original cost and not on current market value.

10. (d) Opening Payment Subtotal Interest 10% Closing

Time

Rupees

1 2,735,500 (1,000,000) 1,735,500 173,550 1,909,050

2 1,909,050 (1,000,000) 909,050

11. (a) & (c) (b) and (d) are relevant to lessee not lessor.

12. (c) Receivable

Receipt Interest Principal Receivable
at Rental
time @ 15% Element after receipt
beginning

T Rupees

31.12.2011 11,420 1,713 4,000 (2,287) 9,133

31.12.2012 9,133 1,370 4,000 (2,630) 6,503

31.12.2013 6,503 975 4,000 (3,025)

13. (c) Assets are usually depreciated over lease term, however, if ownership is transferred
these should be depreciated over useful life.

14. (c) Total payments = Rs. 16,000 + (10,000 x2) + (32,000 x 20 = Rs. 100,000
On straight line basis over four years Rs. 100,000 / 4 = Rs. 25,000

15. (d) Opening Interest payments Principal Closing

balance @ 14% repayments balance
Date
------------------------------ Rs. in million ------------------------------

01-Jul-2013 28.69 (3.00) (3.00) 25.69

30-Jun-2014 25.69 3.59 (7.80) (4.21) 21.48

30-Jun-2015 21.48 3.01 (7.80) (4.79) 16.69

© Emile Woolf International 611 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

16. Rs. The asset would initially be capitalised at Rs. 870,000. This is then depreciated over
580,000 six years, being the shorter of the useful life and the lease term (including any
secondary period).
This would give a depreciation expense of Rs. 145,000 a year. After two years,
accumulated depreciation would be Rs. 290,000 and therefore the carrying amount
would be Rs. 580,000.

17. Rs. PV of MLP Rs. 40,000 x 5.3893 discount factor @7% = Rs. 215,572
216,818
PV of UGRV Rs. 2,000 x 0.6227 discount factor @7% = Rs. 1,246
Total Rs. 216,818

18. Rs. Cost of inventory transferred Rs. 200,000 less present value of unguaranteed
198,754 residual value Rs. 1,246 = Rs. 198,754

19. Rs. Cash Discount Present

Year Particulars
188,545 payment Rs. factor value Rs.

0 First rentals 36,500 1.000 36,500

1-5 Other 5 rentals 36,500 3.993 145,745

PV of Lease Payment 182,245

6 URV 10,000 0.630 6,300

PV of GI 188,545

20. Rs. 30.3 Opening Interest @ payments Principal Closing

million balance 10%x6/12 repayments balance
Date
------------------------------ Rs. in million ------------------------------

31-Dec-17 319.06 15.95 (48) (32.05) 287.01

30-Jun-18 287.01 14.35 (48) (33.66) 253.36

30.3

21. (d) Gross lease rentals payable under the lease agreement

22. (d) Rs. 39.55 million

23. (c) No change in sales revenue and increase in finance income

24. (b) Decrease in current ratio and increase in gearing ratio

25. (a) The lessee has the right to obtain substantially all of the economic benefits from
use of the asset

© Emile Woolf International 612 The Institute of Chartered Accountants of Pakistan