- 11 Marks
FR – NOV 2016 – L2 – Q6b – Leases (IFRS 16)
Calculation of present value of lease payments and determination of lease type for equipment leasing arrangement.
Question
Ijaw Oil Plc has entered into agreement to lease a plant and equipment from Ogoni Leasing Company Limited. The lease period of the plant and equipment is six (6) years. The agreement provides that Ogoni Leasing Company Limited will incur upkeep expenses. The cost of the plant and equipment is N900,000,000,000. The economic useful life is 20 years. Ijaw Oil Plc is to pay annual lease rentals of N150,000,000 in advance over 6 years after which the plant and equipment revert to the lessor. The implicit interest rate is 22% per annum which is stated below:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| PV(N1) | 1.0000 | 0.8197 | 0.6719 | 0.5507 | 0.4514 | 0.3700 | 0.3033 |
You are required to:
i. Calculate the present value of the lease rental of the equipment. (4 Marks)
ii. Identify with justification the kind of lease involved (3 Marks)
iii. Advise on how to treat the lease rentals paid by Ijaw Oil Plc. in the financial statements (1 Mark)
Find Related Questions by Tags, levels, etc.
- Tags: Lease Classification, Lease Payments, Lease Treatment, Lease Type, Present Value
- Level: Level 2