3. Lessee leases asset from Lessor. Fair market value of the asset currently is

Question

3. Lessee leases asset from Lessor. Fair market value of the asset currently is $500,000. Asset as a remaining economic life of 10 years. Lease term is for 7 years. Implict rate on lease is 12% and this rate is NOT known by Lessee, Lessee's incremental borrowing rate is 10%. be worth $150,000 at end of lease term (ie, r guarantee $45,000 of the $150,000 residual value. Lessee believes that asset will be worth at least 45,000 at end of lease term. Lessor believes asset will 0). Lessor requires that Lessee Lease payments of 94,691 are made annually at year-end. Lease inception date is January 1. Lessor incurred $20,000 of initial direct costs. The Lessor paid the initial direct costs in cash, with the offsetting debit to Miscellaneous Expenses at the time of payment. a. Assume Lessor's cost of lease asset-400,000. Classify the lease, book the lease (both Lessee and Lessor entries), and prepare journal entry (both Lessee and Lessor entries) for the first lease payment due December 31. b. Prepare amortization schedule that shows the split between interest and principal for the full term of the lease for Lessor and Lessee.

Explanation / Answer

1. Such transtion is finace lease transation because

a. lease term if for the major part of life which is 7 year out of 10 year

b. when minimum lease payment is greather than or equal to substaintially all of, fair value of assets ,then lease is finace lease

minimum lease payment is= present value of lease payment+ present value of gauranted residual value

=94691*4.564+45000/(1.12)7-20000

=432147+20355-20000

=432524

and fair value is 500000

2 journal entry of lease

in lessor book

-Here Lessor will recognise leasse recievable at

1. minimum lease payment

or

2. Fair value of assets

whichever is less

which is 432525

Lease recievable a/c Dr 432524

To assets 432524

On reciept of lease payment 1st year entry

cash dr 94691

Interest income cr 54300

lease recievable 40391

Amortisation schedule

4. in lesse book

lesse will recognise lease assets at

=pv value of lease payment + minimum gauranted value

=460995+23092

=482087

Lease entry

Lease assets a/c dr 484087

To Lease liability a/c cr 484087

Depreciation entry depreciation equal to=(484087-45000)/7

=62726

Depreciation a/c dr 62440

To assets 62440

Lease payment entry

Lease liabilitya/c dr 46282

interest a/c dr 48409

to cash 94691

Here interest rate is 10% for lessee

and for lessor is 12%

Amortisation schedule

year opening balance lease installment interest principal closing balance 1 452500 94691 54300 40391 412109 2 412109 94691 49453 45238 366871 3 366871 94691 44025 50666 316205 4 316205 94691 37945 56746 259459 5 259458 94691 31135 63556 195903 6 195903 94691 23508 71183 124720 7 124720 96491 14967 79724 45000 7 45000 45000 -

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