Chapter 15, Problem 15.22P

(1)

To determine

Finance lease

Finance lease is a parallel type of direct financing whereby the owner (lessor) purchases the equipment to lease it and received the interest revenue over the period of lease for equipment, apart from the recognition of profit from sale of equipment.

IFRS: International Financial Reporting Standard is abbreviated as IFRS. The IFRS is set up to bring a standard global language in accounting, so that the other firms across the globe can understand the accounting term of all other businesses.

Uncertainties in lease transactions

There are several issues with respect to lease transactions that impact the lessee and lessor accounting. The various issues are as follows:

• Variable lease term
• Variable lease payment
• Purchase options
• Residual values
• Termination penalties.

Variable lease payments

There are several issues related to lease transaction. One among them is variable lease payments. The variable lease payments are recognized when incurred rather than at the commencement of lease. They are included in the lessee’s right-of-use asset and lease liability. The payments may be as follows:

• In-substance fixed payments
• Based on the index, with changes because of index considered only and when the lessee re-measures the lease liability for another cause.

To prepare: the journal entries for TK at the beginning of the lease at January 1, 2016 under IFRS.

(2)

To determine

To prepare: the journal entries for TK at the beginning of the lease at January 1, 2016 under IFRS.