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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