# Determine the initial measurement of right-of-use asset cost

Home, - Initial measurement of the lease liability

Question 1: ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery.

There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for \$90 000. The machinery is expected to have a useful life of five years

There are to be five annual payments of \$140 000, the first being made on 30 June 2024. Included within these payments is \$20 000 representing payment to the lessor for insurance and maintenance of the equipment.

Implicit interest rate: 8 per cent
Present value of an annuity in arrears of \$1 for five years at 8 per cent = 3.9927
Present value of \$1 in five years at 8 per cent = 0.6806

Required:

a) Determine the initial measurement of the lease liability

Periodic lease payments \$120,000* 3.9927                479124

Bargain purchase option \$90,000*0.6806                  61254

Lease liability at the initial measurement                   540378

b) Determine the initial measurement of right-of-use asset cost

Periodic lease payments \$120,000* 3.9927                479124

Bargain purchase option \$90,000*0.6806                  61254

Right of use asset                                     540378

c) Provide the accounting journal entries for the year ended 30 June 2024.

 Date Particulars Debit Credit 01-Jul-23 ROU assets Dr 5,40,378 Lease Liability Cr 5,40,378 (To record ROU assets) 30-Jun-24 Interest expenses Dr. 43,230 Insurance and maintenance expenses Dr. 20,000 Lease liability 76,770 Cash 1,40,000 (To record payment of 1st installment) (540378 * 8%= 43220) 30-Jun-24 Depreciation - ROU assets 1,08,076 Accumulated depreciation 1,08,076 (To record depreciation) (540378/5 years)

Question 2: Discuss when a company in the extractive industries needs to start accounting for its restoration costs? Explain the measurement requirement for potential restoration provisions.