ANSWER
As per the given question,
1. Finance lease is a lease that transfers substantially all the risks and rewards associated with the ownership of an asset. The risks related to ownership of an asset include the possibilities of losses from idle capacity or technological obsolescence, and that flowing from variations in return due to changing economic conditions; rewards incidental to ownership of an asset include an expectation of profitable operations over the asset’s economic life and expectation of gain from appreciation in value or the ultimate realization of the residual value. Title may or may not eventually be transferred to the lessee under finance lease arrangements.
2.
PV of lease payments | 62500 | 6.78637 | 424,148 | |
PV of Bargain purchase option | 6000 | 0.78353 | 4,701 | |
428,849 | ||||
Lease amortization schedule | ||||
Year | Cash | Interest Expense | Reduction in lease obligation | Balance of lease obligation |
Opening balance | 428,849 | |||
0 | 62,500 | - | 62,500 | 366,349 |
1 | 62,500 | 18,317 | 44,183 | 322,167 |
2 | 62,500 | 16,108 | 46,392 | 275,775 |
3 | 62,500 | 13,789 | 48,711 | 227,064 |
4 | 62,500 | 11,353 | 51,147 | 175,917 |
5 | 68,500 | 8,796 | 59,704 | 116,213 |
6 | 62,500 | 5,811 | 56,689 | 59,524 |
7 | 62,500 | 2,976 | 59,524 | -0 |
3. Journal Entries
01-Aug-19 | ||
Lease Equipment | Dr | 428,849 |
Lease Liability | Cr | 428,849 |
Lease Liability | Dr | 62,500 |
Cash | Cr | 62,500 |
31-Jul-19 | ||
Depreciation Equipment | Dr | 53,606 |
Accumulated Depreciation | Cr | 53,606 |
Interest Expense | Dr | 18,317 |
Lease Liability | Dr | 44,183 |
Payable | Cr | 62,500 |
01-Aug-20 | ||
Lease Liability | Dr | 62,500 |
Cash | Cr | 62,500 |
31-Jul-20 | ||
Interest Expense | Dr | 16,108 |
Lease Liability | Dr | 46,392 |
Payable | Cr | 62,500 |
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