Schwann Plc Enters into a Non-Cancellable 5-Year Lease for Office

question 37

Multiple Choice

Schwann Plc enters into a non-cancellable 5-year lease for office space in Bigtown's central business district.The building has an expected remaining life of 40 years.Schwann Plc has been offered a free fit-out of the office as an incentive to take up the lease.The fit-out would have cost Schwann Ltd €90 000 to do itself.The benefits of the fit-out are to be recognised on a straight-line basis.The rental payments are €110 000 per annum.How would the signing of the lease and the first rental payment be recorded by Schwann Plc?

• A) \(\begin{array}{|c|l|r|l|}
• \hline\text { On signing the lease: }\\
• \hline\\
• \hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \\
• \hline \mathrm{Dr} & \text { Deferred lease payments } & 460000 & \\
• \hline \mathrm{Cr} & \text { Lease payable } & & 550000 \\
• \hline\\
• \hline\text { First rental payment: }\\\hline \mathrm{Dr} & \text { Lease payable } & 18000 & \\
• \hline \mathrm{Dr} & \text { Lease rental expense } & 92000 & \\
• \hline \mathrm{Cr} & \text { Deferred lease payments } & & 110000 \\
• \hline
• \end{array}\)
• B) \(\text { On signing the lease: }\)
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \\
• \hline \mathrm{Cr} & \text { Lease incentive liability } & & 90000 \\
• \hline
• \end{array}\)
• \(\text { First rental payment: }\)
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Lease rental expense } & 110000 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 110000\\
• \hline
• \end{array}\)
• C) \[\begin{array}{l}
• \begin{array} { | c | l | c | c | }
• \hline\text { On signing the lease: }\\
• \hline \text { Dr } & \text { Fixtures and fittings } & 90000 & \\
• \hline \mathrm { Cr } & \text { Lease incentive liability } & & 90000 \\\hline\\
• \hline { \text { First rental payment: } } & & \\
• \hline \mathrm { Dr } & \text { Lease incentive liability } & 18000 & \\
• \hline \mathrm { Dr } & \text { Lease rental expense } & 92000 & \\
• \hline \mathrm { Cr } & \text { Cash } && 110000\\
• \hline
• \end{array}
• \end{array}\]
• D) \[\begin{array}{l}\begin{array} { | c | l | c | c | }
• \hline
• \text { On signing the lease: }\\
• \hline \text { Dr } & \text { Building } & 640000 & \\
• \hline \mathrm { Cr } & \text { Lease liability } & & 640000 \\\hline\\
• \hline { \text { First rental payment: } } & & \\
• \hline \mathrm { Dr } & \text { Interest expense } & 18000 & \\
• \hline \mathrm { Dr } & \text { Lease liability } & 92000 & \\
• \hline \mathrm { Cr } & \text { Cash } & &110000 \\
• \hline
• \end{array}
• \end{array}\]

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Definitions:

Economic Order Quantity Model

A formula used in inventory management to determine the optimal order size that minimizes total inventory costs.

Holding Cost

The expenses associated with keeping inventory in stock, such as storage, insurance, and spoilage costs.

Economic Order Quantity

A formula used to determine the most cost-effective quantity to order, balancing ordering costs with holding costs.

EOQ

Economic Order Quantity, a formula used in inventory management to determine the optimal order size that minimizes total costs of inventory holding and ordering.