Question
On January 1, 2026 Moorvale Logistics leased a warehouse for 5 years. It pays $50,000 at the end of each year. The interest rate implicit in the lease cannot be readily determined; Moorvale's incremental borrowing rate is 6%. The lease is not short-term and the warehouse is not a low-value asset.
- Moorvale paid $4,000 of initial direct costs (legal fees to negotiate the lease) in cash.
- The lessor paid Moorvale a $3,000 lease incentive in cash at commencement.
- Moorvale must restore the warehouse at the end of the lease. The present value of the restoration cost is $6,000, recognised as a provision under IAS 37 using a 5% discount rate.
| Present-value factor at 6%, 5 periods | Factor |
|---|
| Present value of an ordinary annuity of 1 | 4.212364 |
Round to the nearest dollar.
Required:
- Lease Liability — the lease liability at commencement.
- Right-of-Use Asset — the cost of the right-of-use asset at commencement.
- Journal Entry — one compound entry at commencement. Use Right-of-Use Asset, Lease Liability, Cash (net of the incentive received and the costs paid) and Provision for Restoration.
Statements in this challenge
- Lease LiabilityNumeric Answer
- Right-of-Use AssetNumeric Answer
- Journal EntryJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach Leases
IFRS 16 — Leases
A lessee recognises a right-of-use asset and a lease liability at commencement, the liability being the present value of the remaining lease payments. The asset then depreciates while the liability unwinds at the discount rate, which is why the two balances diverge over the term.
Common mistakes
- Splitting a payment between interest and principal using the payment date rather than the opening liability and the rate.
- Depreciating the right-of-use asset over the asset's useful life when the term is shorter and ownership does not transfer.
- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.
IFRS vs US GAAP: US GAAP keeps a finance/operating distinction for lessees with a single straight-line expense for operating leases; IFRS 16 uses one model.
Further readingIFRS 16: leases, with journal entries