2. Accounting by lessee On 1 July 2019, True Ltd leased a plastic-moulding machi
ID: 2519926 • Letter: 2
Question
2. Accounting by lessee On 1 July 2019, True Ltd leased a plastic-moulding machine from Grit Ltd. The machine cost Grit Ltd $130 000 to manufacture and had a fair value of $154 109 on 1 July 2019. The lease agreement contained the following provisions. Lease term Annual rental payment, in advance on 1 July each year Residual value at end of the lease term Residual guaranteed by lessee Interest rate implicit in lease The lease is cancellable only with the permission of the lessor. 4 years $41 500 $15000 nil 8% The expected useful life of the machine is 6 years. True Ltd intends to return the machine to the Grit Ltd at the end of the lease term. Included in the annual rental payment is an amount of $1500 to cover the costs of maintenance and insurance paid for by the lessor. Required 1. Prepare the lease payments schedule for the True Ltd (show all workings). 2. Prepare the journal entries in the books of True Ltd for the year ended 30 June 2020.Explanation / Answer
Just the first question, thank you.
Ans
Following assumptions are taken
Minimum lease payment = annual rental payment – cost of maintenance and insurance
Minimum lease payment = $41500 - $1500
Minimum lease payment = $40,000
As cost of maintenance and insurance in included in annual rental payment
First lease payment is made at beginning of the lease term and balance in advance on 1 july every year
Now calculate the present value of all minimum lease payment as calculated below
Present value of minimum lease payments (MLP) = $40,000 + $40,000 x PVIFA(r,n)
Where
PVIFA = present value interest factor of annuity
r = implicit interest rate which is 8%
n = number of period which is 3 years because all lease payments are made in advance
Putting values in formula we get
Present value of minimum lease payments (MLP) = $40,000 + $40,000 x PVIFA(8%,3years)
Present value of minimum lease payments (MLP) = $40,000 + $40,000 x 2.5771
Present value of minimum lease payments (MLP) = $40,000 + $103,084
Present value of minimum lease payments (MLP) = $143,084
The lease schedule of true ltd is calculated and shown below
True Ltd ( Lessee)
Schedule of lease payments
year
MLP(minimum lease payment)
Interest expense(8% per year)
Liability reduction
Liability Balance
$
$
$
$
A
B
C=A-B
1-Jul-19
143084
1-Jul-19
40000
40000
103084
1-Jul-20
40000
8247
31753
71331
1-Jul-21
40000
5706
34294
37037
1-Jul-22
40000
2963
37037
0
160000
16916
143084
True Ltd ( Lessee)
Schedule of lease payments
year
MLP(minimum lease payment)
Interest expense(8% per year)
Liability reduction
Liability Balance
$
$
$
$
A
B
C=A-B
1-Jul-19
143084
1-Jul-19
40000
40000
103084
1-Jul-20
40000
8247
31753
71331
1-Jul-21
40000
5706
34294
37037
1-Jul-22
40000
2963
37037
0
160000
16916
143084
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