Question

Acumen Ltd enters into a 5-year agreement to lease an item of machinery from Ascor Ltd on 1 July 2019. Acumen Ltd incurred costs of $3928 in setting up the lease agreement. The machinery has a fair value of $492 000 at the inception of the lease and it is expected to have an economic life of 6 years, after which time it will have a residual value of $45 000. The lease agreement details are as follows.

Length of lease Commencement date Annual lease payment, payable 30 June each year commencing 30 June 2020 Residual value at the end of the lease term Residual value guarantee by Acumen Ltd Interest rate implicit in the lease The lease is cancellable without any penalties. 5 years 1 July 2019 $110 000 $100 000 $60 000 6%

All insurance and maintenance costs are paid by Ascor Ltd and are expected to amount to $10 000 per year and will be reimbursed by Acumen Ltd by being included in the annual lease payment of $110 000. The machinery will be depreciated on a straight-line basis. It is expected that Acumen Ltd will return the machinery to Ascor Ltd at the end of the lease. (Round all discount factors to 4 decimal points and final figures to whole numbers).

Required

1. Prepare the journal entries to account for the lease in the books of Acumen Ltd for the year ending 30 June 2020.

2. Prepare the journal entries to account for the lease in the books of Acumen Ltd for the year ending 30 June 2024, end of lease term, and the leased asset is returned to the lessor at the guaranteed residual value.

3. Assume now that the fair value at date of return of the leased asset to the lessor is only $45,000. Prepare the journal entries.

Answer 1

P.V (Present value) of Minimum Lease payments=					1,00,000*0.9434+1,00,000*0.89+1,00,000*0.8396+1,00,000*0.7921+1,60,000*0.7473
				=	4,66,078
1		Lease payments Schedule
			LP	Interest Expense	Liabilty Reduction	Liabilty balance
	01-07-2019					4,66,078
	30-06-2020		1,00,000	27,965	72,035	3,94,043
	30-06-2021		1,00,000	23,643	76,357	3,17,686
	30-06-2022		1,00,000	19,061	80,939	2,36,747
	30-06-2023		1,00,000	14,205	85,795	1,50,952
	30-06-2024		1,00,000	9,048	1,50,952	0
				(9057 adjusted to 9048 to make liabilty in end zero)
			Journal entries
	01-07-2019
	Right to use machinery			DR	470006
		Lease liabilty		CR		466078
		Cash		CR		3928
	30-06-2020
	Lease Liabilty			Dr	72,035
	Interest expense			Dr	27,965
	Executory cost			Dr	10,000
		Cash		Cr		1,10,000
	Depreciation expense			Dr	82,001
		Accumulated Dep		Cr		82,001
	(Dep = 1/5-(470006-60000)
	30-06-2024
	Lease Liabilty			Dr	1,50,952
	Interest expense			Dr	9,048
	Executory cost			Dr	10,000
	Accumulated Dep			Dr	4,10,006
		Right to use machinery		Cr		4,70,006
		Cash		Cr		1,10,000
	Depreciation expense			Dr	82,001
		Accumulated Dep		Cr		82,001
	(Dep = 1/5-(470006-60000)
3	Loss on GRV			Dr	15,000
		Cash		Cr		15,000