On 1 July 2021 Fairval Ltd (the lessee) contracts a lease equipment for five yea
ID: 2330982 • Letter: O
Question
On 1 July 2021 Fairval Ltd (the lessee) contracts a lease equipment for five years at an annual rental of $20,000, with the first payment payable immediately and subsequent annual payments due on 30 June. The equipment could have been purchased from the supplier for $80,747 on 1 July 2021 if leasing was not chosen instead. The rate of interest implicit in the lease is 12% and the end of the reporting period is 30 June. Assume the equipment is returned to the lessor at the end of the lease, when the residual value of the equipment is nil.
1)
Provide general journal entries to record the lease on 1 July 2021 for Fairval Ltd.
2)
Provide a schedule showing the division of the lease rental into interest and principal components for the lessee over the term of the lease.
3)
Provide the depreciation schedule for the lessee assuming the right-of-use asset is depreciated over the term of the lease (straight-line method).
4)
Prepare the general journal entries for the lessee for the remaining term of the lease (not covered by part (1) of this question) up until 30 June 2023.
5)
Based on the case, explain the motivation for the standard setter to release the new lease standard (AASB 16).
1)
Provide general journal entries to record the lease on 1 July 2021 for Fairval Ltd.
2)
Provide a schedule showing the division of the lease rental into interest and principal components for the lessee over the term of the lease.
3)
Provide the depreciation schedule for the lessee assuming the right-of-use asset is depreciated over the term of the lease (straight-line method).
4)
Prepare the general journal entries for the lessee for the remaining term of the lease (not covered by part (1) of this question) up until 30 June 2023.
5)
Based on the case, explain the motivation for the standard setter to release the new lease standard (AASB 16).
Explanation / Answer
Part 1 20000 x 4.03735* $ 80,747 * present value of $1 annuity due, n=5 year, i= 12% Date Account titles and explanation Debit Credit Jul 1, 2021 Right of use assets $80,747 Lease liability( present value calculated ) $80,747 Part 2 Time Lease Payment Interest at 12% of lease liability/ROU Principal Lease Liability Jul 1, 2021 $ 80,747 Jul 1, 2021 $ 20,000 $ 20,000 $ 60,747 Jun 30, 2022 $ 20,000 $ 7,290 $ 12,710 $ 48,037 Jun 30, 2023 $ 20,000 $ 5,764 $ 14,236 $ 33,801 Jun 30, 2024 $ 20,000 $ 4,056 $ 15,944 $ 17,857 Jun 30, 2025 $ 20,000 $ 2,143 $ 17,857 $ - Part 3 Depreciation per year = 80747/5 = 16149 year depreciation expense Accumulated depreciation carrying value 0 80747 1 16149 16149 64598 2 16149 32298 48449 3 16149 48447 32300 4 16149 64596 16151 5 16151 80747 0 Part 4 Date Account titles and explanation Debit Credit Jul 1, 2021 Lease liability $20,000 Cash (Lease Payment) $20,000 Jun 30, 2022 Interest expense (12% x [$80,747 – 20,000]) $ 7,290 Lease liability (difference) $ 12,710 Cash (lease payment) $ 20,000 Jun 30, 2022 Amortization expense ($80,747 ÷ 5Years) $ 16,149 Right-of-use equipment $ 16,149 Jun 30, 2023 Interest expense (12% x [$80,747 – 20,000 - 12710]) $ 5,764 Lease liability (difference) $ 14,236 Cash (lease payment) $ 20,000 Jun 30, 2023 Amortization expense ($80,747 ÷ 5Years) $ 16,149 Right-of-use equipment $ 16,149 Part 5 Motivation behind the setting new lease standard was bringing more transparency in leased assets and liability presentation, earlier in case of operating lease, no assets or liability was recognised which is now recognised. Now the lessee has to recognise assets and liability for the rights and obligation created by leases. Note: I have tried my best for correct solution and work , still you need any further help, please ask in comment and don’t forget to rate positively.
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