Question

# Lessor leasing company agrees to lease equipment to Lessee corp. on Jan 1, 2019, both Lessor...

Lessor leasing company agrees to lease equipment to Lessee corp. on Jan 1, 2019, both Lessor and Lessee follows IFRS. The following information relates to the lease agreement: 1- the lease term is 7 years, no renewal, 2- Lessor acquired the equipment this day Jan 1, 2019 for \$560,000 cash, the useful life 10 years 3- at the end of the term the equipment to be returned to the lessor with guaranteed residual value of \$40,000 4- the lease agreement require annual rental payments beginning of Jan 1 each yaer 5- Lessor charges 10% on all it is transactions and it is the same rate that Lessee can borrow from there Bank. Instructions: Considering this as Financing type (Capital) Lease, answer the following questions: 1- Calculate the amount of the annual rental (lease) payment 2- If Dec 31 is the fiscal year end for Lessee co., prepare the journal entries that Lessee would make in 2019 and 2020, Lessee did not use reversing entries 3- From the information you have calculated and recorded, identify all balances related to the lease that would be reported on Lessee Balance sheet on Dec 31,2020

Computation of annual lease payment -

Cost of equipment= \$560,000

Residual value after 7 years= \$40,000

Present value of residual value after 7 years= (40,000×0.5132)

=\$ 20,526 (approx.)

Fair value to be recovered from lease payments =

\$ 560,000- \$20,526

= \$539,474

Present value of annuity after 7 years= 4.8684

Annual lease payment = \$539,474/ 4.8684 = \$110,811

Journal entries in the books of lessor-

Fixed assets dr. 560,000

To lease liability/exp. 560,000

(Being asset taken on lease)

Lease liability/exp. dr. 80,000

Interest exp. 30,811

To cash 110,811

(Being lease rental paid for )

And the above entries will be same for 2020

Amounts to be shown in balance sheet-

Asset on lease- \$560,000

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