With clear font and in details please Albert Corp. manufacturs truck trailers. O

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With clear font and in details please

Albert Corp. manufacturs truck trailers. On January 1, 2018, Albert leases ten trailers to Einstein Inc. under a six- year non-cancellable lease agreement. The following information about the lease and the trailers is provided: Equal annual payments (due on December 31 each year) will be payable, to provide Albert with an 8% return on their investment. Einstein has an option to buy the trailers for $1 at the end of the lease. Each trailer has an expected useful life of nine years. 4 At anuary 1, 2018, the fair value of each trailer is $50,000. The cost of each trailer to Albert Corp. is $45,000. Einstein could borrow at 10% to purchase the trailer separately. Collectibility of the lease payments is reasonably assured, and any unreimbursable costs under the lease that are likely to be incurred by Albert can be reasonably estimated. 2 3 6 Both Albert and Einstein follow IFRS Required a) b) c) What type of lease is this for the lessee and lessor? Briefly explain your answer. Calculate the annual lease payment. Prepare the journal entries for the LESSEE for 2018 and 2019 to record the lease agreement, the receipt of the lease rentals, and the recognition of income. (First calculate the value of the equipment and liability to the lessee). Prepare the journal entries for the LESSOR for 2018 and 2019 to record the lease agreement, the receipt of the lease rentals, and the recognition of income. Assume the use of a perpetual inventory system d) Round all amounts to the nearest dollar.

Explanation / Answer

(a) This is a Finance lease for the lessor and the lessee as there are 2 indicaters to classify it as a Finance lease-

1. Einstein (lessee) has the option to purchase the trailer at $1 at the end of lease term that is expected to be sufficiently lower than the fair at the date the option becomes exerciseble for it to be reasonably certain, at the inception of the lease that the option will be exercised.

2. The lease term is for the major part (in this case 6/9*100 = 66.67%) of the economic life of the asset even if title is not transferred.

(b) Calculation of annual lease payment (ALP)

Present value of MInimum Lease Payment (MLP) = Fair Value of aseet (trailer)

PV of MLP = ALP x Present Value of Annuity Factor @ 8% for 6 years

50000 = ALP x 4.62287966

ALP = $10816 per trailer

Note : The cost of trailer to albert co. i.e. $45000 is not considered here for calculation of ALP.

(c) Value of Equipment (trailer) = 10816*10 x PVAF @ 10% For 6 years

= $ 471065

Liability to the lessee = $ 471065

Journal entries in the books of Einstein (Lessee)

1.1.2018 Dr. Trailer a/c..................................471065

Cr. Albert Co. (Lessor) a/c..............471065

31.12.2018 Dr. Finance Charges a/c .............47106

Cr. Albert Co.a/c..........................47106

31.12.2018 Dr. Albert Co. a/c ........................108160

Cr. Bank a/c.................................108160

31.12.2018 Dr. P&L a/c .................................47106

Cr. Finance Charges a/c..............47106

31.12.2019 Dr. Finance Charges a/c .............41001

Cr. Albert Co.a/c..........................41001

31.12.2019 Dr. Albert Co. a/c ........................108160

Cr. Bank a/c.................................108160

31.12.2019 Dr. P&L a/c .................................41001

Cr. Finance Charges a/c..............41001

(d) Journal entries in the books of Lessor

1.1.2018 Dr. Einstein ( Lessee) a/c..............500000

Cr. Trailer a/c.................................450000

Cr. Profit on Sale of Trailer a/c.......50000

31.12.2018 Dr. Einstein a/c .............................40000

Cr. Finance Income.......................40000

31.12.2018 Dr. Bank a/c..................................108160

Cr. Einstein a/c..............................108160

31.12.2018 Dr.. Profit on Sale of Trailer a/c.......50000

Dr. Finance Income a/c...................40000

  Cr. P & L a/c ......................................90000

31.12.2019 Dr. Einstein a/c .............................34547

Cr. Finance Income.......................34547

31.12.2019 Dr. Bank a/c..................................108160

Cr. Einstein a/c..............................108160

31.12.2019 Dr. Finance income a/c.................34547

Cr. P & L a/c..................................34547

Working Note :

Calculation of Finance Charges for lessee

= Amt. Outstanding * Borrowing rate

= 471065*10%

= 47106

Calculation of finance income for lessor

= 500000*8%

= 40000

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