Lessee Ltd.- Lease Case Essay

970 Words Dec 3rd, 2012 4 Pages
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1. Was the junior accountant’s analysis correct? Why or why not?
No, the junior accountant’s analysis is not correct in classifying the lease as an operating lease in accordance with IFRS. Whether or not a lease is classified as a finance or an operating lease depends on if all of the benefits as well as risks of ownership have been shifted from the lessor to the lessee.
According to IAS 17-10(d), a lease must be classified as a finance if either “the lease term is for the major portion of the asset’s economic life” or “at the inception of the lease the present value of the minimum payment amounts to at least substantially all of the fair value of the lease asset.” With
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He states, “Since the lessee’s incremental borrowing rate is greater than the lessor’s implicit rate in the lease, compute the present value of the minimum lease payments using the 11 percent rate.” This is wrong because IFRS does not permit the lessee to use the incremental rate if the implicate rate known. He should have used %10 for his calculations. * At commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity's incremental borrowing rate) [IAS 17.20] * PV of the minimum lease payments = $100,000x2.4896 + $20,000 x 0.7513 = $263,716
Lastly, the senior accountant

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