a. A lease is a finance lease if it satisfies any of the following conditions:
Lease period = 3 years
Useful life of asset = 8 years
Minimum lease payments = PV of lease rent + PV of bargain purchase price
= $20,000 * 2.48685 + $33,660 * 0.75132
= $49,737 + $25,289 = $75,026
Value of asset = Lease rent * (PV for annuity due 10%, 3 years + 1)
= $20,000 * (2.73554 + 1) = $74,711
Since the minimum lease payments are more than the value of asset, the lease is a finance lease.
b. Journal entry for signing of the lease in books of B Ltd
Account | Debit | Credit |
Asset | $75,026 | |
Lease Liability | $75,026 |
c. Journal entry for first payment
Account | Debit | Credit |
Lease rent | $20,000 | |
Cash | $20,000 |
d. Journal entry on December 31, 2019
Account | Debit | Credit |
Depreciation ($75,026 / 3) | $25,009 | |
Accumulated depreciation | $25,009 |
e. Journal entry for second payment
Account | Debit | Credit |
Lease rent | $14,497 | |
Interest expense | $5,503 | |
Cash | $20,000 |
Calculation of interest expense
Liability Beginning (a) | Interest (b) | Rent paid (c) | Liability Ending (a + b - c) | |
01-01-2019 | 75026 | 20000 | 55026 | |
01-01-2020 | 55026 | 5503 | 20000 | 40529 |
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