IAS 17 – Disposal of a Leased Asset

Hi there, hope you’re well. I just had a question about the journal entries for leases, if that’s okay.

The treatment of a lease whilst the asset is still in possession of the lessee makes sense, its just what happens at the end of the lease period which often isn’t covered in textbooks, etc.

I understand there are various different things that a lessee can do with an asset at the end of the lease period, depending on what type of lease they have, but what might the journal entries for these events be?

– If they keep the asset

Depreciation is now based upon the useful life of the asset, not the lease, but there would also be an accompanying cash payment involved in order to cover the unguaranteed residual value so that the asset will now be the lessees property.

Considering the asset will already be recorded at cost less depreciation and impairment, is the cash expense to own the asset an operating expense?

– If the asset is handed back in

I assume that in this case the carrying amount of the asset will equal the residual value of the asset as at the end of the lease period, and will then be written off as an expense? Would this be an operating expense?

– If the asset is traded for credit against another piece of equipment provided by the lessor

Will the carrying amount of the asset be written against the new asset’s acquisition? If so I’m slightly confused about how this would be executed.

Debit Accumulated Depreciation and Impairment of Old Leased Asset
Credit Old Leased Asset Cost

Credit Old Leased Asset (now at carrying value)
Credit Cash for the remainder needed to buy the asset
Debit New asset

Is this correct?

I hope this post isnt too long, thanks in advance.