Question

Question 3 (16 marks) Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of S180 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 as follows: Date of entering lease: 1 July 2019. Duration of lease: four years. .Life of leased asset: five years, after which it will have no residual value. Lease payments: $ 100,000 at the end of each year Interest rate implicit in the lease: 10 per cent. .Unguaranteed residual: $50 000. Fair value of truck at inception of the lease: $351 140 REQUIRED (a) Demonstrate that the interest rate implicit in the lease is 10 per cent. (b) Prepare the journal entries to account for the lease transaction in the books of the lessor. City Vans Ltd at Prepare the journal entries to account for the lease transaction in the books of the lessee, Deliveries Ltd, at 1 July 2019 and 30 June 2020. 1 July 2019 and 30 June 2020. (c) (d) On 30 June 2023 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 2023 in relation to the termination of the lease and the purchase of the truck.

Answer 1

(a)

Fair Value at inception of lease	351140.00	351140.00
Fair Value at end of lease	=FV(0.1,4,-100000,351140,0)	-50004.07

The future fair value of truck at the rate of 10% at end of 4 years is equal to 50 thousand which is equal to the residual value of the truck. this shows that the interest of 10% is implicit in the lease

(b)

Jul-19	Deliveries Ltd	Dr	100000
	Asset on Lease	Cr	64886
	Interest	Cr	35114
Jun-20	Bank A/c	Dr	1,00,000
	Deliveries Ltd	Cr	1,00,000

(c)

Jul-19	Asset on Lease	Dr	100000
	City Vans Ltd	Cr	100000
Jun-20	City Vans Ltd	Dr	100000
	Bank A/c	Cr	100000