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Accounting for Leases Sample Assignment

Accounting for Leases – Lessee perspective

Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of $180,000. The truck will be painted with Deliveries Ltd’s logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $40,000. Deliveries Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are:

Date of entering the lease: 1 July 2009

Duration of the lease: 4 years

Life of leased asset: 5 years (after which there is no salvage value)

Lease payments: $100,000 at the end of each year

Interest rate implicit in the lease: 10%

Unguaranteed residual: $50,000

Fair value of truck at inception of lease: $351,140

Required:

  1. Explain how and why the lease would be classified for both the lessee and the lessor
  2. Demonstrate that the interest rate implicit in the lease is 10%
  3. Prepare a schedule for the lease payments for the lessor (City Vans Ltd)
  4. Prepare the journal entries to account for the lease transaction in the books of the lessor at 1 July 2009 & 30 June 2010
  5. Prepare a schedule for the lease payments for the lessee (Deliveries Ltd)
  6. Prepare the journal entries to account for the lease transaction in the books of the lessee at 1 July 2009 & 30 June 2010
  7. On 30 June 2013 Deliveries Ltd pays the residual of $50,000 and purchases the truck. Prepare all journal entries in the books of Deliveries Ltd for 30 June 2013 in relation to the termination of the lease and the purchase of the truck

Solution

(a)

Lessee:

Non-cancellability – unclear

Transfer of risks and rewards – being painted with their logo. They get to use it  - Finance lease

Bargain purchase option – yes (assuming the bargain bit)

Major part of economic life – 4/5

PV substantially all of FV – see part B

Therefore – Finance lease

Same for lessor

(b)

Present value of lease payments

$100 000

n = 4, I = 10

$316 990

Present value of unguaranteed residual

$50 000

n = 4, I = 10

34 150

$351 140

(c) Shedule of lease payments – lessor

Year ended

Lease payment

Interest

Lease reduction

Closing balance

1 July 2009

351 140

30 June 2010

100 000

35 114

  64 886

286 254

30 June 2011

100 000

28 625

  71 375

214 879

30 June 2012

100 000

21 488

  78 512

136 367

30 June 2013

150 000

13 637

136 363

          4

Payment 06/13 includes residual 

(d)

1 July 2009

Dr

Cost of goods sold

180 000

Cr

Inventory

180 000

Dr

Lease Receivable

351 140

Cr

Sales

351 140

30/06/2010

Dr

Cash

100 000

Cr

Interest revenue

35 114

Cr

Lease Receivable

64 886

(e) Lessee PV of lease liability is $316 990 per part a), excludes unguaranteed residual

Lease payment

Interest expense

Lease reduction

Closing lease liability

1 July 2009

316 990

30 June 2010

100 000

31 699

68 301

248 689

30 June 2011

100 000

24 869

75 131

173 558

30 June 2012

100 000

17 356

82 644

  90 914

30 June 2013

100 000

  9 091

90 909

5

(f)

1/07/2009

Dr

Leased Truck

316 990

Cr

Lease Liability

316 990

30/06/2010

Dr

Interest exp

31 699

Dr

Lease Liability

68 301

Cr

Cash

100 000

Dr

Amortisation exp

63 398

Cr

Acc. Amortisation

63 398

Amortisation is $316 990/5yrs as intention is to keep.

(g)

30/06/2013

Dr

Interest exp

9 091

Dr

Lease liability

90 909

Cr

Cash

100 000

Dr

Amortisation exp

63 398

Cr

Acc. amortisation

63 398

Dr

Truck

50 000

Cr

Cash

50 000

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