DipIFR Syllabus B. Elements of financial statements - Lessor Accounting - Finance Lease - Past Papers ^{8 / 10}

Delta is an entity which prepares financial statements to 31 March each year. Each year, the financial statements are authorised for issue on 25 May. The following events have occurred which are relevant to the year ended 31 March 2017:

Event (a)
On 1 April 2016, Delta purchased an asset for $771,000 and immediately leased this asset to entity X. The lease term was for five years and the lease rental, receivable annually in arrears on 31 March, was $200,000. Delta incurred direct costs of $20,000 in arranging this lease. The annual rate of interest implicit in this lease was 10%. Under the terms of the lease, entity X is responsible for insuring the asset and for carrying out any necessary repairs and maintenance of the asset. At a discount rate of 10% per annum the present value of $1 receivable annually in arrears for five years is $3·80. (8 marks)

Required:
Explain and state (where possible by quantifying amounts) how the three events would be reported in the financial statements of Delta for the year ended 31 March 2017.

Note: The mark allocation is shown against each of the three events above. You should assume that all amounts described here are material.

Delta is an entity which prepares financial statements to 30 September each year. The financial statements for the year ended 30 September 2016 are shortly to be authorised for issue. The following events are relevant to these financial statements:

(a) On 1 October 2014, Delta purchased an asset for $20 million. The estimated useful life of the asset was 10 years, with an estimated residual value of zero. Delta immediately leased the asset to Epsilon. The lease term was 10 years and the annual rental, payable in advance by Epsilon, was $2,787,000. Delta incurred direct costs of $200,000 in arranging the lease. The lease contained no early termination clauses and responsibility for repairs and maintenance of the asset rest with Epsilon for the duration of the lease. The directors of Delta correctly computed the annual rate of interest implicit in the lease as 8%. At an annual discount rate of 8% the present value of $1 receivable at the start of years 1–10 is $7·247. (8 marks)

Required:
Explain and show how the three events would be reported in the financial statements of Delta for the year ended 30 September 2016.

Notes:
1. The mark allocation is shown against each of the three events above.
2. In explaining event (b), you do not need to consider the impact on inventory and cost of sales.

Delta is an entity which prepares financial statements to 31 March each year. Each year the financial statements are authorised for issue on 20 May. The following events are relevant to the year ended 31 March 2016:

Event (a)
On 1 April 2014, Delta granted 2,000 employees 1,000 share options each. The options are due to vest on 31 March 2017 provided the relevant employees remain in employment over the three-year period ending on 31 March 2017.

On 1 April 2014, the directors of Delta estimated that 1,800 employees would qualify for the options on 31 March 2017. This estimate was amended to 1,850 employees on 31 March 2015, and further amended to 1,840 employees on 31 March 2016.

On 1 April 2014, the fair value of an option was $1·20. The fair value increased to $1·30 by 31 March 2015 but, due to challenging trading conditions, the fair value declined after 31 March 2015. On 30 September 2015, when the fair value of an option was 90 cents, the directors repriced the options and this caused the fair value to increase to $1·05. Trading conditions improved in the second half of the year and by 31 March 2016 the fair value of an option was $1·25. Any additional costs that have occurred as a result of the repricing of the options on 30 September 2015 should be spread over the remaining vesting period from 30 September 2015 to 31 March 2017. (9 marks)

Required:
Explain and show (where possible by quantifying amounts) how the three events would be reported in the financial statements of Delta for the year ended 31 March 2016.

Note: The mark allocation is shown against each of the three events above. You should assume that all amounts described here are material. When discussing event (a), you are not required to consider disclosure requirements.