Question

Purell Corporation enters into a lease with Excel Inc., a lessor, on August 15, 2018 that does not transfer ownership or contain a bargain purchase option, and it is not for specialized equipment. Both Purell and Excel use IAS 17. The lease covers three years of the equipment’s eight-year useful life, and the present value of the minimum lease payments is less than 90% of the equipment’s fair value.

Required: 1) Prepare Purell’s journal entry to record its August 15, 2018 annual lease payment of $31,500. Purell has a November 30th year end.

Answer 1

THE LEASE SHOULD BE TREATED AS OPERATING LEASE BECAUSE

1- IT DOESNOT TRANSFER THE OWNERSHIP TO LESSEE AT THE END OF THE LEASE PERIOD.

2-THE PRESENT VALUE OF THE LEASE PAYMENT IS LESS THAN 90% OF THE FAIR VALUE OF ASSET.

3-THERE IS NO BARGAIN PURCHASE OPTION .

4- THE LEASE PERIOD IS NOT EQUAL TO THE EXPECTED LIFE OF ASSET.

5- THE ASSET IS NOT SPECIALISED EQUIPMENT.

PURELL'S JOURNAL ENTRY

AUGUST 15 2018- NO ENTRY

NOVEMBER 30 2018-

LEASE EXPENSE ACCOUNT DEBIT $31500

TO BANK ACCOUNT $31500

[ BEING LEASE EXPENSE PAID]

SAME ENTRY WILL PASS FOR NEXT TWO YEARS.