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

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

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