This activity aims to develop among the students an understanding as how to organize the amortization schedule through lease rentals and their presentations along with the calculation of depreciation after revaluation and amount of unrealized surplus at the end of lease term as per IAS 16 and IAS 17.
Learning Outcomes
After going through this activity, the students would be able to analyze lease terms, preparing lease amortization schedule, and how to calculate the value of unrealized surplus at the end of lease term.
Case
Ralph Leasing enters into a non-cancelable lease contract on January 1st, 2001 with RP Company to supply highly sophisticated laboratory equipment on the following terms:
a) The contract is for a lease term of 6 years with the immediate inception;
b) Annual installment of Rs.124,798 is to be made on January 1st each year commencing from 2001:
c) The asset will revert to the lessor at the end of the lease term.
d) Residual value of the equipment at end of lease term has been guaranteed by the lessee at Rs.50, 000;
e) The lessor’s implicit rate is 12 % for this type of lease; &
f) The economic life of this leased equipment with fair value of Rs. 600,000 has been estimated at 6 years.
The lessee uses following accounting policy to treat this equipment is its books of accounts:
a) Straight-line depreciation method with full year depreciation in the year of purchase and no depreciation in the year of sale;
b) Useful life for all such equipment is estimated at 8 years;
In 2004, the equipment was revalued at Rs. 560,000 by an independent valuer. At the end of sixth year, the asset was disposed of at Rs. 350,000 due to some technical faults developed therein.
Required:
a) Apply each test whether the lease is a financial lease or operating lease;
b) Prepare a lease amortization schedule suitable for the lessee for the entire lease term;
c) Amount of depreciation after revaluation; &
d) Amount of unrealized surplus at the end of lease term.
(Hint: Test five conditions as per IAS 17 to declared a lease as finance lease)
Revaluation method to calculate depreciation
Under this method the fixed assets are valued at the end of each accounting period. The difference between the value at the beginning of the period and the value at the end of the period represents the depreciation value which is charged against the profit and loss account. This method is used in case of assets like loose tools, packages, Farmers’ livestock etc.
Formula for Calculating:
Depreciation = Value of asset at the end – Value of asset at the beginning + Any new purchases
Explain renewal method to calculate depreciation.
In this method the full cost of the asset is charged as depreciation during the period in which the asset is renewed. No depreciation is charged in between the period. This method can be used if the asset is of small value and is renewed frequently.