Lessee Ltd., a British company that applies IFRSs, leased equipment from Lessor

Question

Lessee Ltd., a British company that applies IFRSs, leased equipment from Lessor Inc. on January 1, 2013, for a period of three years. Lease payments of $100,000 are due to Lessor Inc. each year. Other expenses (e.g., insurance, taxes, maintenance) are also to be paid by Lessee Ltd. and amount to $2,000 per year. The lessor did not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Lessor Inc. on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Lessee Ltd. has guaranteed $20,000 as the residual value at the end of the lease term. The $20,000 represents the expected value of the leased equipment to the lessee at the end of the lease term. The salvage value of the equipment is expected to be $2,000 after the end of its economic life. The lessee’s incremental borrowing rate is 11 percent (Lessor’s implicit rate is 10 percent and is calculable by the lessee from the lease agreement).

Prepare an amortization schedule and provide journal entries for 2013 and 2014.

Explanation / Answer

Ans

Ans 2

Workings

Lease -Amortisation Schedule Opening -Lease Obligation Opening -Guranteed residual Value Principal repayment Interest Lease obligation Interest Gurantted residual Value Closing -Lease Obligation Closing -Guranteed residual Value                             2,44,371.47       14,623.83 100000 26,880.86     1,608.62 1,71,252.33 16,232.45                             1,71,252.33       16,232.45 100000 18,837.76     1,785.57      90,090.09 18,018.02                                 90,090.09       18,018.02 100000     9,909.91     1,981.98                     -   20,000.00

Ans 2

2013 Interest Expense       26,880.86 Lease Obligation       73,119.14 Cash 1,00,000.00 Interest Expense          1,608.62 Guranteed residual Value Liability        1,608.62 2014 Interest Expense       18,837.76 Lease Obligation       81,162.24 Cash 1,00,000.00 Interest Expense          1,785.57 Guranteed residual Value Liability        1,785.57

Workings

Minimum Lease Payments Amount Lease Rentals 100000 Per year for 3 Years 3,00,000.00 Guaranteed Residual Value      20,000.00 Total MLP 3,20,000.00 Present Value of MLP at lesse's incremantal borrowing rate 258995.299 Present Value of MLP is almost equal to fair value of the asset. Hence it is a Financial Lease MLP 100000 0.900900901 90090.0901 100000 0.811622433 81162.2433 100000 0.731191381 73119.1381 244371.472 20000 0.731191381 14623.8276

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