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.
At commencement Moorvale recognised a lease liability of $210,618 and a right-of-use asset of $217,618. The right-of-use asset is depreciated straight-line over the 5-year lease term with no residual value. Round to the nearest dollar.
Required:
- Journal Entries — every entry on December 31, 2026: interest on the lease liability, the $50,000 payment, depreciation, and the unwinding of the restoration provision. Use Interest Expense, Lease Liability, Cash, Depreciation Expense, Accumulated Depreciation - Right-of-Use Asset, Unwinding of Discount on Provision and Provision for Restoration.
- Closing Liability — the lease liability at December 31, 2026.
- Statement Impact — the combined effect of the December 31 entries.
Statements in this challenge
- Journal EntriesJournal Entry
- Closing LiabilityNumeric Answer
- Statement ImpactStatement Impact
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- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.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