Question

The following facts pertain to a non-cancelable lease agreement between Metlock Leasing Company and Ivanhoe Company, a lessee. May 1, 2020 Commencement date Annual lease payment due at the beginning of each year, beginning with May 1, 2020 Bargain purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2020 Lessor's implicit rate Lessee's incremental borrowing rate $19,656.69 $7,000 5 years 10 years $65,000 $93,000 6% 6% The collectibility of the lease payments by Metlock is probable. Click here to view factor tables. Compute the amount of the lease receivable at commencement of the lease. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answer to 2 decimal places, e.g. 5,275.15.) Lease receivable at commencement $

Answer 1

(a)
P.V of annuity due of 1 for n=5 for 6%	4.46511
P.V of 1 for n=5 for 6%	0.74726
Present value of periodic rental payment($19656.69*4.46511)	87769
Present Value of Bargain purchase option($7000*.74726)	5231
Lease receivable at the inception=($87769+$5231)	93000
b)
Metlock Leasing Company
Lease Amortization Schedule
	(A)	(B)	(C )	(D )
Date	Annual lease payment Plus BPO	Interest 6% on lease receivable	Recovery of lease receivable	Lease Receivable
01-05-2020				$                                93,000
01-05-2020	$                                                   19,656.69		$                       19,656.69	$                          73,343.41
01-05-2021	$                                                   19,656.69	$             4,400.60	$                       15,256.09	$                          58,087.33
01-05-2022	$                                                   19,656.69	$             3,485.24	$                       16,171.45	$                          41,915.88
01-05-2023	$                                                   19,656.69	$             2,514.95	$                       17,141.74	$                          24,774.14
01-05-2024	$                                                   19,656.69	$             1,486.45	$                       18,170.24	$                            6,603.90
30-04-2025	$                                                     7,000.00	$                 396.23	$                         6,603.90	$                                         -
Total	$                                               1,05,283.45	$           12,283.48	$                       93,000.10	$                      2,04,724.66
	Working
Date	Annual lease payment Plus BPO	Interest 6% on lease receivable	Recovery of lease receivable	Lease Receivable
01-05-2020				$                                93,000
01-05-2020	$                                                   19,656.69		$                       19,656.69	($93000-$19656.69)
01-05-2021	$                                                   19,656.69	($73343.41*6%)	($19656.69-$4400.60)	($7743.41-$15256.09)
01-05-2022	$                                                   19,656.69	($58087.33*6%)	($19656.69-$3485.24)	($58087.33-$16171.45)
01-05-2023	$                                                   19,656.69	($41915.88*6%)	($19656.69-$2514.95)	($41915.88-$17141.74)
01-05-2024	$                                                   19,656.69	($24774.14*6%)	($19656.69-$1486.45)	($24774.14-$18170.24)
30-04-2025	$                                                     7,000.00	($6603.90*6%)	($7000-$396.23)
Journal Entries
Date	Account Title & Explanation	Debit	Credit
01-05-2020	Lease Receivable	93000
	Cost of goods sold	65000
	To Sales Revenue		93000
	To Inventory		65000
	(Being amount of sales revenue and cost of goods sold)
	Cash	19656.69
	To Lease Receivable		19656.69
	(Being amount of cash received )
31-12-2020	Interest Receivable($4400.60*8/12)	$             2,933.74
	To Interest Revenue		$                         2,933.74
	(Being amount of Interest Revenue)
01-05-2021	Cash	19656.69
	To Lease receivable		$                       15,256.09
	To Interest Receivable		$                         2,933.74
	To Interest Revenue		$                         1,466.87
31-12-2021	Interest Receivable($3485.24*8/12)	$             2,323.49
	To Interest Revenue		$                         2,323.49
	(Being amount of Interest Revenue)
01-05-2022	Cash	19656.69
	To Lease receivable		$                       16,171.45
	To Interest Receivable		$                         2,323.49
	To Interest Revenue		$                         1,161.75
31-12-2022	Interest Receivable($2514.95*8/12)	$             1,676.64
	To Interest Revenue		$                         1,676.64
	(Being amount of Interest Revenue)

Answer 2

Answer:

Part 1)The nature of lease to Skysong Company is Finance Lease

Explanation:

As per IFRS 16 all leases are treated as Finance lease from Lessee's point of view and accounted in the same manner (exceptions: leases of less that 12 months or of low value assets)r.

Part 2)The n;ature of this lease to Sheridan is a Finance Lease

Explanation:

As per IAS 17(sic)

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following: [IAS 17.10]

• the lease transfers ownership of the asset to the lessee by the end of the lease term
• the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised
• the lease term is for the major part of the economic life of the asset, even if title is not transferred
• at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
• the lease assets are of a specialised nature such that only the lessee can use them without major modifications being made

in our case the present value of minimum lease payments is $87,769.20 which is 94.38% of fair value of asset. As asset may be classified as finance lease.

Beginning of year Amt PVF@6% Amt*PVF 1 19656.691 1| 19656.69 2 19656.69 0.9434| 18544.05 3 19656.69 0.8900 17494.38 4 19656.69 0.8396 16504.14 5 19656.69 0.7921 15569.94 Total 87769.2 % of fair value=87769.20/93000=94.38%

Part 3)

Date 5/1/20 5/1/20 5/1/21 5/1/22 5/1/23 5/1/24 4/30/25 Annual Lease Payment Interest on Liability (E*6%) Reduction of lease liability(B-C) Lease Liability(Prev E-D) 87769.2 19656.69 0.00 19656.69 68112.51 19656.69 4086.75 15569.94 52542.57 19656.69 3152.55 16504.14 36038.43 19656.69 2162.31 17494.38 18544.05 19656.69 1112.64 18544.05 0.00 0 0 0 0 98283.45 10514.25398 87769.19602

Date Account Titles and Explanation 1 May, 20 Right-of-use Asset To Lease liability (To record the lease) Debit($) Credit($) 87,769.20 87,769.20 Calculation: lat Present Value 1 19,656.69 1st lease payment as per amortisation schedule above 1 May, 20 Lease Liability To Cash (To record the first lease Payment) 19,656.69 1 2,724.50 -4086.75.8/12(for 8 months) 31 Dec, 2d Interest Expense To Interest Payable (to Record interest Expense) 2,724.50 - 58,512.80 !=87,769.20-8/60 (eight months from total life of 60 months) 31 Dec, 20 Depreciation Expense To Accumulated Depreciation (to record amortisation of the 58,512.80 Page -use asset Page 2 2,724.50 1 May, 21 Interest Payable To Interest Expense i=Reversal entry for interest applied 2,724.50 1 I=as per Amortisation schedule 1 May, 21 Lease Liability Interest Expense To Cash 15569.94 4086.75 1 19,656.69 2,101.70 i =3152.55*8/12 (for 8 months) 31 Dec, 2. Interest Expense To Interest Payable (to Record interest Expense) 2,101.70 =87769.20*12/60 (for whole Year) 31 Dec, 21 Depreciation Expense 17,553.84 To Accumulated Depreciation lito record amortisation of the right-of-use asset) 17,553.84

*Please note that there may be variation as to how depreciation is recorded, as some people may recommend for whole year concept.

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