Fundo entered into a 20-year operating lease for a property on 1 October 2000 which has a remaining life of eight years at 1 October 2012. The rental payments are $2.3 million per annum. Prior to 1 October 2012, Fundo obtained permission from the owner of the property to make some internal alterations to the property so that it can be used for a new manufacturing process which Fundo is undertaking. The cost of these alterations was $7 million and they were completed on 1 October 2012 (the time taken to complete the alterations can be taken as being negligible). A condition of being granted permission was that Fundo would have to restore the property to its original condition before handing back the property at the end of the lease. The estimated restoration cost on 1 October 2012, discounted at 8% per annum to its present value, is $5 million. Required:(a) Explain how the lease, the alterations to the leased property and the restoration costs should be treated in the financial statements of Fundo for the year ended 30 September 2013

Lease agreement is the agreement which is giving right to use the property for the mentioned time…

Answered: Fundo entered into a 20-year operating…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter22: Accounting For Changes And Errors.

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Fundo entered into a 20-year operating lease for a property on 1 October 2000 which has a remaining life of eight years at 1 October 2012. The rental payments are $2.3 million per annum. Prior to 1 October 2012, Fundo obtained permission from the owner of the property to make some internal alterations to the property so that it can be used for a new manufacturing process which Fundo is undertaking. The cost of these alterations was $7 million and they were completed on 1 October 2012 (the time taken to complete the alterations can be taken as being negligible). A condition of being granted permission was that Fundo would have to restore the property to its original condition before handing back the property at the end of the lease. The estimated restoration cost on 1 October 2012, discounted at 8% per annum to its present value, is $5 million.

Required:

(a) Explain how the lease, the alterations to the leased property and the restoration costs should be treated in the financial statements of Fundo for the year ended 30 September 2013

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