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Determine the fair value of the portable sound recording studio at 1 July 2019

Question 1

Discuss at least two advantages that were available for reporting entities in the previous Accounting Standard for leases AASB 117 Leases. Further, discuss if reporting entities might be more likely to buy rather than lease assets now that they are required to capitalise leases in accordance with AASB 16 Leases. Justify your answer. 5 marks

Question 2 The following two scenario involve a fibre optic cable. Scenario 1 Customer enters into a 15-year contract with a utilities company (Supplier) for the right to use three specified, physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (i.e. Customer ‘lights’ the fibres and decides what data, and how much data, those fibres will transport). If the fibres are damaged, Supplier is responsible for the repairs and maintenance. Supplier owns extra fibres, but can substitute those for Customer’s fibres only for reasons of repairs, maintenance or malfunction (and is obliged to substitute the fibres in these cases).

Scenario 2 Customer enters into a 15-year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to Tokyo. The specified amount is equivalent to Customer having the use of the full capacity of three fibre strands within the cable (the cable contains 15 fibres with similar capacities). Supplier makes decisions about the transmission of data (i.e. Supplier ‘lights’ the fibres and makes decisions about which fibres are used to transmit Customer’s traffic and the electronic equipment connected to the fibres).

Required: Determine for each scenario separately whether:

• There is an identifiable asset

• The customer controls the use of the identified asset throughout the period of use

• The contract contains a lease. Question 3 Annabel Ltd leased a portable sound recording studio from Lessor Ltd. Lessor has no material initial direct cots. Annabel does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:

• Date of entering lease: 1 July 2019

• Duration of lease: four years

• Life of leased asset: five years

• Lease payments: $50 000 at the beginning of each year

• First lease payment: 1 July 2019

• Lease expires: 1 July 2023

• Interest rate implicit in the lease: 8 per cent

• Guaranteed residual value expected to be paid: $40 000.


(a) Determine the fair value of the portable sound recording studio at 1 July 2019. 5marks

(b) Prepare a schedule for the lease payments from 1 July 2019 up to 1 July 2023. 15 marks (c) Prepare the journal entries to account for the lease in the books of Annabel Ltd at 1 July 2019, 30 June 2020, 1 July 2020 and 30 June 2021. 30 marks

(d) At the termination of the lease, Annabel Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Annabel Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Annabel Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023. 13 marks Maximum word limit for questions 1 and 2 is 750 words

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