Answer:
a) To calculate the total lease payments, we need to sum up the monthly rental lease payments over the lease term. The monthly rental lease payment is $90,000, and the lease term is 5 years.
Total lease payments = Monthly rental lease payment * Number of months in the lease term
Total lease payments = $90,000 * 12 * 5 = $5,400,000
Therefore, the total lease payments amount to $5,400,000.
b) To classify the lease under IAS 17, we need to determine whether it is a finance lease or an operating lease. According to IAS 17, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.
To determine this, we compare the lease term (5 years) with the useful life of the leased asset (12 years). Since the lease term represents more than 75% of the useful life, it indicates that the lease term is effectively the major part of the asset's remaining economic life. This suggests that the risks and rewards of ownership are transferred to the lessee.
Therefore, the lease should be classified as a finance lease.
c) Under IFRS 16, leases are recognized differently. IFRS 16 eliminates the distinction between finance leases and operating leases for lessees and introduces a single accounting model. Under IFRS 16, lessees recognize a right-of-use asset and a corresponding lease liability on their balance sheet for most leases.
d) To prepare the lease schedule and journal entries, we will assume a calendar year-end reporting period.
Year 1:
Lease payment:
Lease payment expense: $90,000 x 12 = $1,080,000
Lease liability: $1,080,000
Interest expense: $420,000
Interest payable: $420,000
Year-end adjusting entry:
Interest expense: $420,000
Interest payable: $420,000
Year 2:
Lease payment:
Lease payment expense: $90,000 x 12 = $1,080,000
Lease liability: $1,080,000
Interest expense: $212,000
Interest payable: $212,000
Year-end adjusting entry:
Interest expense: $212,000
Interest payable: $212,000
Year 3:
Lease payment:
Lease payment expense: $90,000 x 12 = $1,080,000
Lease liability: $1,080,000
Interest expense: $188,000
Interest payable: $188,000
Year-end adjusting entry:
Interest expense: $188,000
Interest payable: $188,000
Please note that I have only provided the journal entries for the interest expense and lease payments. Other entries related to the depreciation of the right-of-use asset, lease liability reduction, and any other relevant transactions would need to be considered as well.