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Dear all,
Please help me with journal entries for below financial transactions.
My company is a foreign toy company. We enter into a lease agreement with property developer (landlord) to rent an outlet in a shopping mall. Then, we entered into another contract with a local operator to run the store.
The local operator will bear the rental cost, electricity and employee wages — in return we give them a percentage of the revenue. So, I can see that we somehow lease or sublease them our outlet to them to sell. Revenue will be credited to my company’s bank account and at the end of the month, I will pay them their sale commission deduct all payment I made on behalf of the local operator.
So, I don’t know how to efficiently account for the transactions in our books. Should I classify it as payment on behalf? Or I will have 2 lease schedules (as lessee and intermediate lessor)? The second option seems like a very long process, and I don’t know if IFRS16 have specific requirements/ rules regarding this.
Any help would be greatly appreciated.
Welcome to our forums, but unfortunately we can only give technical advice relating to the ACCA exams, not practical consultancy advice. This is what ChatGPT suggests:
“Managing these transactions involves a few steps to ensure accurate accounting in accordance with IFRS 16. Here’s how you can handle it:
Lease Agreement with Property Developer (Landlord):
Debit: Leasehold Property (Long-term Asset)
Credit: Lease Liability (Long-term Liability)
Contract with Local Operator:
Since you’re essentially subleasing the outlet to the local operator, you should account for it as a sublease.
Debit: Lease Liability (reduce the liability from the initial lease agreement)
Credit: Sublease Income (recognize the income from subleasing)
Note: You may need to adjust the lease liability and asset value on your balance sheet to reflect the reduced space you’re responsible for after subleasing.
Revenue from Sales:
Debit: Bank Account (for the revenue received)
Credit: Sales Revenue (recognize revenue from sales)
Expenses Paid on Behalf of Local Operator:
Debit: Expenses (such as electricity, employee wages)
Credit: Bank Account (for the payments made on behalf of the local operator)
Payment to Local Operator:
Debit: Sublease Expense (this is the commission paid to the local operator)
Credit: Bank Account (for the payment made to the local operator)
Monthly Settlement:
Debit: Sublease Expense (adjustment for any remaining expenses paid on behalf of the local operator)
Credit: Bank Account (for the final settlement payment to the local operator)
This method allows you to account for the lease agreement with the property developer separately from the sublease arrangement with the local operator, ensuring clarity and compliance with IFRS 16. It might involve a bit of initial setup, but it provides a clear picture of your company’s financial obligations and revenue streams related to the outlet in the shopping mall.”ChatGPT can make mistakes. Consider checking important information.
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