Company Accounting Homework

This assignment focuses on company accounting, specifically addressing the implications of AASB 16 on lease reporting, the identification of assets in lease scenarios, and the calculation of fair value for a portable sound recording studio. It includes detailed analyses of advantages and disadvantages of the new accounting standards, as well as practical examples of lease payment schedules and journal entries for financial reporting.

Company Accounting
Leases
STUDENT ID:
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Company Accounting
Question 1
Two advantages related to the previous AASB 117 for leases are highlighted below.
 With regards to reporting of leases, the earlier standard was less costly and complex
in comparison to the new standard that is applicable in this context.
 The leverage of the business was truly reflected under the earlier AASB 117.
However, under the new norms with capitalising requirements tends to portray the
lessee in a more leveraged state than in actuality.
Under the new AASB 16 accounting standard for lease accounting, it is quite plausible that
the businesses would prefer to buy assets instead of leasing the same primarily on account of
the issues related to incremental requirement related to lease capitalisation. In relation to the
balance sheet of the lessee, the capital lease value is reflected as both an asset along with a
corresponding liability. The net worth of the lessee would not be impacted as the two values
which are equal in magnitude tend to offset each other. However, there is incremental
liability present which tends to worsen the lessee’s debt equity ratio which the investors and
other critical stakeholders may view negatively.
Question 2
Scenario 1
 As the customer has three distinct dark fibres allocated which can be physically
identified, hence there is an identifiable asset in existence.
 The various decision making about the use of the fibre in relation to what and how
much data would be transferred using these three fibres is available with the customer
and hence the asset control is also with the customer.
 The customer has the right to use which is apparent from the fact that even when the
three dark fibres are damaged, the supplier would need to make alternate provisions
and therefore a lease in contained in the contract.
Scenario 2
 In the given case, the customer has been provided a certain capacity instead of a
physical asset with can be identified. Also, the provided capacity is also a small
portion of the total capacity of the cable since it has 15 fibres. Hence, there is no
identifiable asset in existence in the given case.
 The decision with regards to data transmission and using desired fibres is taken not by
the customer but by the supplier and hence customer control over the asset is lacking.
 It is apparent that in the given case, the asset control is not transferred to the customer
which implies that no lease exists based on the given facts.
Question 3

Company Accounting
a) The fair value of the portable sound recording studio as on July 1, 2019 can be estimated
by computing the present value of both the lease payments and also the residual
guaranteed payment at the end of the lease.
Rental Payments (Present Value) = PVIFA (n=4, i=8%) * 50,000 = 3.5771 *50000 = $
178,855
Guaranteed residual payment (Present Value) = PVIF (n=4, i=8%) * 40000 = 0.735 *
40000 = $ 29,400
Hence, fair value of lease = 178,855 + 29,400 = $ 208,255
b) The lease payment schedule starting from July 1, 2019 to July 1, 2023 is indicated below.
Key explanations
 The initial lease liability as on July 1, 2019 is equal to the fair value of the lease.
 Since, the first lease payment is made on July 1, 2019, hence the outstanding liability
is reduced by the same amount on the same day.
 On the outstanding lease liability, interest would be charged @ 8% p.a. and hence
from the lease payment of $ 50,000, a portion would go to interest payment while the
remaining would be used to lower the outstanding lease liability.
 As the lease liability decrease, the interest expense also decreases and more amount is
diverted into liability reduction.
 The $ 40,000 payment made on July 1, 2023 is the guaranteed residual payment.
c) The requisite journal entries pertaining to the books of Annabel Ltd for the given years are
as indicated below.

Company Accounting
d) It is apparent that the guaranteed residual value for the studio at the end of the lease period
was $ 40,000. However, the fair value of the studio at the lease period ending is only $
25,000. Thus, the difference of the two i.e. $ 15,000 would be the amount that Annabel
Ltd would need to make to Lessor Ltd. The corresponding journal entries are as
highlighted below.