Question

rart V. Lessee and Lessor enter into a lease agreement on January 1, 2019. for equipment. The following data are relevant to the lease agreement: The term of the non-cancelable lease is 5 years. Payments of $13.000 including executory costs of $3.000 are due at the end each year. 2. The equipment has an economic life of 10 years with a residual value of $15,000 at the end of the lease, but not guaranteed. The equipment's fair value equals its cost of $49,970 3. Lessee depreciates similar machinery it owns on the straight-line basis. 44. Lessee's incremental borrowing rate is 09 per wear Lessee is aware that the lessor used an implicit rate of 6% in computing the lease payments. The collectability of the lease payments is probable for the lessor. INSTRUCTIONS: (a) Indicate the type of lease to the Lessee and Lessor, (b) Prepare the journal entries on the books of Lessee and Lessor through December 31, 2023,

Answer 1

Ans. 1 The present lease is Operating Lease as follows,

1. The lease term is greater less than or equal to 75% of the asset’s useful economic life; ( 5 years against the 10 years life )
2. The present value of the lease rental of such a lease is less than 90% of the fair value of the asset leased at the time of lease; ( Present value $ 38897 (10000*3.89) while Fair value is $ 49970)
3. The agreement does not allow the transfer of ownership of the equipment from the lessor to the lessee after the expiry of the lease term.

Ans. 2,

Lessor Books Cr Dr 10000 Transaction date Accounts 31-12-2019 Cash Dr To Annual Lease rental Income (Being Annul lease Income received) 13000 10000 31-12-2020 Cash Dr To Annual Lease rental Income (Being Annul lease Income received) 13000 10000 31-12-2021 Cash Dr To Annual Lease rental Income (Being Annul lease Income received) 13000 10000 31-12-2022 Cash Dr To Annual Lease rental Income (Being Annul lease Income received) 13000 10000 31-12-2023 Cash Dr To Annual Lease rental Income (Being Annul lease Income received) 13000

Leasee Books Cr Transaction date Accounts 31-12-2019 Annual Lease Rental Dr Executory Expenses Dr To Cash (Being Annual lease rent paid) Dr 10,000 3000 13,000 10,000 3000 31-12-2020 Annual Lease Rental Dr Executory Expenses Dr To Cash (Being Annual lease rent paid) 13,000 10,000 3000 31-12-2021 Annual Lease Rental Dr Executory Expenses Dr To Cash ( Being Annual lease rent paid) 13,000 10,000 3000 31-12-2022 Annual Lease Rental Dr Executory Expenses Dr To Cash (Being Annual lease rent paid) 13,000 10,000 3000 31-12-2023 Annual Lease Rental Dr Executory Expenses Dr To Cash (Being Annual lease rent paid) 13,000