Sun Limited has entered into a Lease Agreement with Moon Limited for taking on lease an office building of 1000 square feet at the rate of 500 per…

(a) At the effective date of the modification (at the beginning of Year 7), Sun Ltd. (Lessee) remeasures the lease liability based on: (a) An eight-year remaining lease term (b) Annual payments of 5,00,000 and (c) Lessee's incremental borrowing rate of 7% p.a. 1. Calculation of Lease liability as at commencement date Year Lease Payment (A) ₹ Present value factor @ 6% (B) Present value of lease payments (A x B = C) ₹ 1 5,00,000 0.943 4,71,500 2 5,00,000 0.890 4,45,000 3 5,00,000 0.840 4,20,000 4 5,00,000 0.792 3,96,000 5 5,00,000 0.747 3,73,500 6 5,00,000 0.705 3,52,500 7 5,00,000 0.665 3,32,500 8 5,00,000 0.627 3,13,500 9 5,00,000 0.592 2,96,000 10 5,00,000 0.558 2,79,000 Lease liability as at commencement date 36,79,500 Alternatively, Present Value of lease liability may be calculated as follows: 5,00,000 x 7.359 = 36,79,500. 2. Calculation of Lease liability immediately before modification date Year Opening lease liability (A) ₹ Interest @ 6% (B) = [A x 6%] ₹ Lease payments (C) ₹ Closing liability (D) = [A+B-C] ₹ 1 36,79,500 (W.N.1) 2,20,770 5,00,000 34,00,270 2 34,00,270 2,04,016 5,00,000 31,04,286 3 31,04,286 1,86,257 5,00,000 27,90,543 4 27,90,543 1,67,433 5,00,000 24,57,976 5 24,57,976 1,47,479 5,00,000 21,05,455 6 21,05,455 1,26,327 5,00,000 17,31,782 Lease liability as at modification date 17,31,782 3. Calculation of modified lease liability Year Lease Payment (A) ₹ Present value factor @ 7% (B) Present value of lease payments (A x B=C) ₹ 7 5,00,000 0.935 4,67,500 8 5,00,000 0.873 4,36,500 9 5,00,000 0.816 4,08,000 10 5,00,000 0.763 3,81,500 11 5,00,000 0.713 3,56,500 12 5,00,000 0.666 3,33,000 13 5,00,000 0.623 3,11,500 14 5,00,000 0.582 2,91,000 Modified lease liability 29,85,500 Alternatively, Present Value of lease payment of modified lease term may be calculated as follows: = 5,00,000 x 5.971 = 29,85,500. 4. Adjustment to ROU asset Particulars ₹ Modified Lease liability (W.N.3) 29,85,500 Original Lease liability as at modification date (W.N.2) (17,31,782) Adjustment to ROU asset 12,53,718 The modified lease liability equals - 29,85,500 (W.N. 3). The lease liability immediately before the modification (including the recognition of the interest expense until the end of Year 6) is 17,31,782 (W.N.2). Sun Ltd. (Lessee) recognises the difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability immediately before the modification (i.e.,12,53,718) (W.N.4) as an adjustment to the ROU Asset. The ROU asset will be increased by - 12,53,718 on the date of modification.