leases hw

Requirements:

1. The assignment is to be submitted online via Turnitin on the Blackboard by 12 noon (NZ time) Thursday May 14th. Remember to include your name and student ID at the top of your assignment.

2. Where calculations are required students should show workings and justify choices made.

3. The assignment must be readable, understandable and follow accounting conventions where appropriate or marks will be deducted.

4. Late submissions may result in marks being deducted.

a. You have recently started an internship at an investment fund. Currently, the Warehouse accounts for leases using NZ IAS 17, as opposed to the new lease standard NZ IFRS 16. Accordingly, they have disclosed the information below for operating leases (i.e. leases that are not capitalised), which are all for retail buildings. The Warehouse has also recently issued bonds that pay 5.30% interest, but has older bonds that pay 6.0% interest.

Your supervisor has asked you to consider the effect of NZ IFRS 16 on the Warehouse’s financial statements and thus valuation, by capitalising the operating leases. To do so, first fill in the lease template below. You will need to calculate the opening lease liability as the present value of minimum lease payments. (Hint: You can modify the excel template for the lecture example to calculate this). Remember to justify your choices made for your answer (8 Marks)

b. Record the journal entries relating to the lease in 2019 (i.e. Year 1) not including the issuance of the lease. The Warehouse depreciates buildings over a 50 year life. (6 Marks)

c. The information below is from the Warehouse’s 2019 annual report. Show the effect on the financial statements by recalculating the ROA (EBIT divided by total assets), and debt to total assets (total liabilities divided by total assets) for what they would be if the lease was capitalised (i.e. that the Warehouse has recorded what you calculated in a. and b. rather than recording it as an operating lease). (6 Marks)

Total Assets = $1,050,821

Total Liabilities = $568,788

EBIT = $102,943

d. Whilst reading the annual report you notice the below comment in the notes:

Using this information, and your above answers, explain to your manager how you expect the Warehouse share price to change. (5 Marks)

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