Question
Calder Manufacturing recognised a lease on 1 January 2025 with a lease liability and right-of-use asset of $165,600.
- The lease term is four years, with payments of $50,000 annually in arrears.
- The interest rate used to discount the lease is 8%.
- The right-of-use asset is depreciated on a straight-line basis over the lease term, with no residual value. Ownership does not transfer.
Required: Prepare the journal entries at 31 December 2025 for (a) interest on the lease liability, (b) the lease payment, and (c) depreciation of the right-of-use asset.
Interest accrues on the carrying amount of the liability. Depreciation is calculated on the asset and is entirely separate from the payment.
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- Treating the whole lease payment as an expense, which is the superseded operating-lease treatment.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