Accounting for Leases Sample Assignment
Accounting for Leases – Lessee perspective
Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of $180,000. The truck will be painted with Deliveries Ltd’s logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $40,000. Deliveries Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are:
Date of entering the lease: 1 July 2009
Duration of the lease: 4 years
Life of leased asset: 5 years (after which there is no salvage value)
Lease payments: $100,000 at the end of each year
Interest rate implicit in the lease: 10%
Unguaranteed residual: $50,000
Fair value of truck at inception of lease: $351,140
Required:
- Explain how and why the lease would be classified for both the lessee and the lessor
- Demonstrate that the interest rate implicit in the lease is 10%
- Prepare a schedule for the lease payments for the lessor (City Vans Ltd)
- Prepare the journal entries to account for the lease transaction in the books of the lessor at 1 July 2009 & 30 June 2010
- Prepare a schedule for the lease payments for the lessee (Deliveries Ltd)
- Prepare the journal entries to account for the lease transaction in the books of the lessee at 1 July 2009 & 30 June 2010
- On 30 June 2013 Deliveries Ltd pays the residual of $50,000 and purchases the truck. Prepare all journal entries in the books of Deliveries Ltd for 30 June 2013 in relation to the termination of the lease and the purchase of the truck
Solution
(a)
Lessee:
Non-cancellability – unclear
Transfer of risks and rewards – being painted with their logo. They get to use it - Finance lease
Bargain purchase option – yes (assuming the bargain bit)
Major part of economic life – 4/5
PV substantially all of FV – see part B
Therefore – Finance lease
Same for lessor
(b)
|
Present value of lease payments |
$100 000 |
n = 4, I = 10 |
$316 990 |
|
Present value of unguaranteed residual |
$50 000 |
n = 4, I = 10 |
34 150 |
|
$351 140 |
(c) Shedule of lease payments – lessor
|
Year ended |
Lease payment |
Interest |
Lease reduction |
Closing balance |
|
1 July 2009 |
351 140 | |||
|
30 June 2010 |
100 000 |
35 114 |
64 886 |
286 254 |
|
30 June 2011 |
100 000 |
28 625 |
71 375 |
214 879 |
|
30 June 2012 |
100 000 |
21 488 |
78 512 |
136 367 |
|
30 June 2013 |
150 000 |
13 637 |
136 363 |
4 |
Payment 06/13 includes residual
(d)
|
1 July 2009 | |||
|
Dr |
Cost of goods sold |
180 000 | |
|
Cr |
Inventory |
180 000 | |
|
Dr |
Lease Receivable |
351 140 | |
|
Cr |
Sales |
351 140 | |
| 30/06/2010 | |||
|
Dr |
Cash |
100 000 | |
|
Cr |
Interest revenue |
35 114 | |
|
Cr |
Lease Receivable |
64 886 |
(e) Lessee PV of lease liability is $316 990 per part a), excludes unguaranteed residual
|
Lease payment |
Interest expense |
Lease reduction |
Closing lease liability | |
|
1 July 2009 |
316 990 | |||
|
30 June 2010 |
100 000 |
31 699 |
68 301 |
248 689 |
|
30 June 2011 |
100 000 |
24 869 |
75 131 |
173 558 |
|
30 June 2012 |
100 000 |
17 356 |
82 644 |
90 914 |
|
30 June 2013 |
100 000 |
9 091 |
90 909 |
5 |
(f)
|
1/07/2009 | |||
|
Dr |
Leased Truck |
316 990 | |
|
Cr |
Lease Liability |
316 990 | |
|
30/06/2010 | |||
|
Dr |
Interest exp |
31 699 | |
|
Dr |
Lease Liability |
68 301 | |
|
Cr |
Cash |
100 000 | |
|
Dr |
Amortisation exp |
63 398 | |
|
Cr |
Acc. Amortisation |
63 398 |
Amortisation is $316 990/5yrs as intention is to keep.
(g)
|
30/06/2013 | |||
|
Dr |
Interest exp |
9 091 | |
|
Dr |
Lease liability |
90 909 | |
|
Cr |
Cash |
100 000 | |
|
Dr |
Amortisation exp |
63 398 | |
|
Cr |
Acc. amortisation |
63 398 | |
|
Dr |
Truck |
50 000 | |
|
Cr |
Cash |
50 000 |
