Question

Tyson Ltd enters into a non-cancellable five-year lease agreement with Benson Ltd on 1 July 2018. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $369 824. The machinery is expected to have an economic life of six years, after which time it will have an expected salvage value of $60 000. There is a bargain purchase option that Tyson Ltd will be able to exercise at the end of the fifth year for $80 000. The implicit interest rate is 12% per annum. There are to be five annual payments of $100 000, the first being made on 30 June 2019. Included within the $100 000 lease payments is an amount of $10 000 representing payment to Benson Ltd for insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. Appendix A provides the present value of $1 in periods. Appendix B provides the present value of an annuity of $1 per period for n periods.

Required:

(a) Calculate the present value of the minimum lease payments.

(b) Prepare the journal entries for the year ending 30 June 2019.

(c) Prepare the journal entries for the year ending 30 June 2020.

Answer 1

(a)

the present value of the minimum lease payments: $358475.47

=Present value of annual lease payments + Present Value of Residual Value

=((90000/1.12)+(90000/(1.12)^2)+(90000/(1.12)^3))+(90000/(1.12)^4)+(90000/(1.12)^5)+(60000/(1.12)^5)

$      358,475.47

(b)

Journal Entries for the year ended 30th June 2019

In the books of Lessor
Accounts Title	Debit	Credit
Lease Receivable	358475
Machinery		358475
Cash	100000
Lease Receivable		46983
Finance Income (358475 * 12%)		43017
Insurance & Maintenance		10000

In the books of Lessee
Accounts Title	Debit	Credit
Leased Asset	358475
Lease Liability		358475
Insurance & Maintenance	10000
Lease Liability	46983
Interest Expense	43017
Cash		100000
Depreciation	59695
Leased Asset		59695
(358475-60000)/5

(c)

Journal Entries for the year ended 30th June 2020

In the books of Lessor
Accounts Title	Debit	Credit
Cash	100000
Lease Receivable		52621
Finance Income ((358475-46983)*12%)		37379
Insurance & Maintenance		10000

In the books of Lessee
Accounts Title	Debit	Credit
Insurance & Maintenance	10000
Lease Liability	52621
Interest Expense	37379
Cash		100000
Depreciation	59695
Leased Asset		59695
(358475-60000)/5

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