Lease

Problem: Suppose you are the finance and accounts manager of Dynamic Ltd. You have
currently analysed and suggested that among the two alternatives to purchasing or leasing a
lorry, taking a lease from the Vache Lease Company Ltd. is the most favorable. After that, the
following things happened:

On January 1, 2021, Dynamic entered into a two-year lease for a lorry. The contract contains an
option to extend the lease term for a further year. Dynamic believes that it is reasonable and
certain to exercise this option. Lorries have a useful economic life of 10 years.

Lease payments are Tk. 10,000 per year for the initial term and Tk. 15,000 per year for the
option period. All payments are due at the end of the year. To obtain the lease, Dynamic incurs
initial direct costs of Tk. 3,000. The lessor immediately reimburses Tk. 1,000 of these costs.

The rate of interest within the lease is not readily determinable. Dynamic’s incremental rate of
borrowing is 5%.

Requirements
1. Calculate the initial carrying amount of the lease liability and the right-of-use asset.
2. Provide the journal entries to be recorded in the books of Dynamic’s of the financial
transaction.
3. Prepare an amortisation schedule for the lessee for the lease term.
4. Prepare the necessary journal entries in the books of accounts of Dynamic for the periods
of 20X1 and 20X2.
5. What figures will be shown in the financial statements for the years ended December
31st, 20X1 and 20X2 for the lease assets and liabilities?