Question

Mini Ltd leased a machine from Levi Ltd. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,298,674. There is a bargain purchase option that Mini Ltd will be able to exercise at the end of the fifth year for $260,000.

The terms of the lease are as follows:

• Date of entering lease: 1 July 2019.
• Duration of lease: five years.
• Life of leased asset: six years.
• Lease payments: $320,000 on 30 June each year (starting 30 June 2020).
• Included within the $320,000 lease payments is an amount of $20,000 representing payment to the lessor for the insurance and maintenance of the equipment.
• Interest rate implicit in the lease: 10 per cent.
• The equipment is to be depreciated on a straight-line basis.

Required:

1. Prepare the journal entries to account for the lease in the books of Mini Ltd at 1 July 2019 and for the year ending 30 June 2020. (6 marks)

Answer 1

Right of the use of Assets

Asset Dr = $1,298,674

Depreciation = (1,298,674 + 20,000) / 5 years

= $263,734

Journal entry in the book of Mini Ltd. at 1st July 2019

Right of the user Dr 1,318,674

Depreciation Cr    263,734

Interest Cr 131,867

Lease liability Cr 923,073