Exercise 20-3 The following facts are for a non-cancellable lease agreement betw
ID: 341507 • Letter: E
Question
Exercise 20-3 The following facts are for a non-cancellable lease agreement between Sunland Corporation and Russell Corporation, a lessee: Inception date Annual lease payent due at the beginning of each year, starting July 1, 2017 Purchase option price at end of lease term reasonably certain to be exercised by Russell Lease term Economic life of leased equipment Lessor's cost Fair value of asset at July 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate July 1, 2017 $ 21,076.11 3,600 5 years 10 years $48,000 $ 88,600 11% 11% $ The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. The lessee assumes responsibility for all executory costs. Both Russell and Sunland use IFRS 16 Click here t o view the factor tableExplanation / Answer
a) The amount of right of use asset and lease liability will be equal to sum of present value of annual lease payments paid at the beginning of each year and present value of bargain purchase option which is calculated as follows:-
Right of Use Asset = PV of Annual Lease payments+PV of bargain option
PV of Annual Lease pauments = First lease payment + [Annual Lease payments*PVAF(11%,4 yrs)]
= $21,076.11 + ($21,076.11*3.10245)
= $21,076.11+$65,387.58 = $86,463.69
PV of bargain purchase option = Bargain purchase price*PVF(11%,5 yrs)
= $3,600*0.59345 = $2,136.42
Right of Use asset = $86,463.69+$2,136.42 = $88,600.11
Lease Liability is equal to right of use asset less first lease payment of $21,076.11 (i.e. $88,600.11-$21,076.11 = $67,524)
b) Russell Corporation (Lessee)
Lease Amortization Schedule (Amount in $)
The interest on June 30, 2022 is taken as balancing figure to avoid rounding off difference.
c) Journal Entries in the lessee's books (Amount in $)
Date Annual Lease payment plus BPO (1) Interest (11%) on Unpaid Obligation (2) Reduction of Lease Obligation (3 = 1-2) Balance of Lease obligation 7/1/17 67,524 7/1/18 21,076.11 (67,524*11%) = 7,427.64 13,648.47 (67,524-13,648.47) = 53,875.53 7/1/19 21,076.11 (53,875.53*11%) = 5,926.31 15,149.80 (53,875.53-15,149.80) = 38,725.73 7/1/20 21,076.11 (38,725.73*11%) = 4,259.83 16,816.28 (38,725.73-16,816.28) = 21,909.45 7/1/21 21,076.11 (21,909.45*11%) = 2,410.04 (21,076.11-2,410.04) = 18,666.07 (21,909.45-18,666.07) = 3,243.38 6/30/22 3,600 (3,600-3,243.38) = 356.62 3,243.38 0 Total 87,904.44 20,380.44 67,524.00Related Questions
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