Question

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

Answer 1

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