Question
Northwind Logistics leases a forklift on 1 January 2025 for five years.
- The present value of the lease payments not yet paid is $84,000.
- A payment of $6,000 was made in cash on the commencement date.
- There are no initial direct costs, incentives or restoration obligations.
Required: Prepare the journal entry to recognise the lease on 1 January 2025.
Remember: the lease liability is only the payments still outstanding. A payment made at commencement is not part of the liability, but it does form part of the right-of-use asset.
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- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.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