QUESTION OF IFRS 16- LEASE

 REVIEW QUESTION – IFRS 16 - LEASE

On 1 January 2021, Dynamic entered into a two-year lease for a lorry. The contract contains an 

option to extend the lease term for a further year. Dynamic believes that it is reasonably certain to 

exercise this option. Lorries have a useful life of ten years.

Lease payments are Tzs 10 million per year for the initial term and Tzs 15 million per year for the 

option period. All payments are due at the end of the year. To obtain the lease, Dynamic incurs 

initial direct costs of Tzs 3 million. The interest rate within the lease is not readily determinable. 

Dynamic’s incremental rate of borrowing is 5%.

Required:

(a) Calculate the initial carrying amount of the lease liability and the right- of-use asset and 

provide the double entries needed to record these amounts in Dynamic's financial records.

(b) Prepare extracts from Dynamic's financial statements in respect of the lease agreement for 

the year ended 31 December 2021.

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