(b) Happy Limited leased a machine directly from Great Machinery (the manufactur
ID: 2513715 • Letter: #
Question
(b) Happy Limited leased a machine directly from Great Machinery (the manufacturer) on 1 January 2017. The details of the lease agreement are shown as below: Lease term Payment Useful life of the machine Cost of machine to Great Machinery Implicit interest rate 5 years S20,000 (every six months, beginning 1 January 2017) 8 years S70,000 14% The contract specified that ownership is transferable to the lessee at the end of the lease. Depreciation follows a straight-line pattern, with no residual value. Required: (Answers should be rounded to the nearest dollar.) (i) Compute the present value of the minimum lease payment (MLP) (2 marks) Il necessary journal entries for Great Machinery, from the inception of the lease (8 marks) through the second lease payment on 1 July 2017.Explanation / Answer
Answer to Question I :
Present value of Minimum lease payment (MLP)
= PMT * ((1-(1/(1+r)^n))/r) + Payment being made on 1.1.2017 (i.e. first annuity)
Where
PMT = amount of each annuity payment i.e. $20,000
r = interest rate = 7% (since annuity payments are made semi annually, as such semi annual interest has been taken instead of annual interest)
n = the number of payments i.e. 6 – 1 = 5
(as 1st payment is to be made on 1.01.2017 & the MLP is being calculated on same day, as such, the first payment has been excluded from the period)
= $20,000 * (1 – (1 / (1+7%)^5))/7% + $20,000
= $20,000 * (1- .7130)/7%+ $20,000
= $20,000 * 4.1+ $20,000
= $ 82,000+ $20,000
= $ 102,000
Journal Entries in books of
Solution to Question No. 2
Note: This being the case where ownership is transferable, & MLP exceeds the fair value of machinery, hence being treated as Sale type lease & following shall be the journal entries
Journal Entries in books of Great Machinery
Date
Particulars
CF
Amount (Dr)
Amount (Cr)
01.01.2017
Lease Recievable Dr.
102000
To Sale
102000
(Entry to reflect sale of machinery & creation of lease recievable from lessee in MLP
01.01.2017
Cost of Goods Sold Dr.
100000
To Machinery Account
100000
Entry to reflect the outgo of machinery & recognising the same as expense in form of COGS
01.01.2017
Cash Dr.
20000
To lease recievable
20000
(Entry to recognize the first payment received
01.07.2017
Cash Dr
20000
To Lease recievable
18691
To Interest Revenue of lease
1309
Entry to recognize second payment; interest revenue has been calculated in form of interest earned on lease, calculation is as under:-
Payment
ROI
MLP
Interest
A
B
A*B
A- MLP
20000
20000
20000
1.07
18691.59
1308.411
20000
1.1449
17468.77
2531.225
20000
1.225043
16325.96
3674.042
20000
1.310796
15257.9
4742.096
20000
1.402552
14259.72
5740.276
102003.9
Solution to Question No. 2
Note: This being the case where ownership is transferable, & MLP exceeds the fair value of machinery, hence being treated as Sale type lease & following shall be the journal entries
Journal Entries in books of Great Machinery
Date
Particulars
CF
Amount (Dr)
Amount (Cr)
01.01.2017
Lease Recievable Dr.
102000
To Sale
102000
(Entry to reflect sale of machinery & creation of lease recievable from lessee in MLP
01.01.2017
Cost of Goods Sold Dr.
100000
To Machinery Account
100000
Entry to reflect the outgo of machinery & recognising the same as expense in form of COGS
01.01.2017
Cash Dr.
20000
To lease recievable
20000
(Entry to recognize the first payment received
01.07.2017
Cash Dr
20000
To Lease recievable
18691
To Interest Revenue of lease
1309
Entry to recognize second payment; interest revenue has been calculated in form of interest earned on lease, calculation is as under:-
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.