Question

On 30 June 2015, ABC Ltd entered into a 10-year finance lease for the right to use an item of equipment. The fair value of the equipment at the inception of the lease is $2,286,262. Lease payments are made in advance on the 30 June each year. An extract of the lease repayments schedule is shown below:

ABC LTD

Extract of Lease Payments Schedule

	Minimum Lease Payments $	Interest expense $	Reduction in Liability $	Balance of Liability $
30 June 2015				2 286 262
30 June 2015	320 000	—	320 000	1 966 262
30 June 2016	320 000	196 626	123 374	1 842 888
30 June 2017	320 000	184 288	135 712	1 707 176

Required

Based on the Lease Repayment Schedule, prepare the journal entries for ABC Ltd to account for the finance lease payments from 30 June 2015 to 30 June 2017.

Answer 1

Solution:

Journal Entries - ABC Ltd
Date	Particulars	Debit	Credit
30-Jun-15	Equipment Dr	$2,286,262.00
	To Lease Payable		$2,286,262.00
	(To record equipment purchased on lease)
30-Jun-15	Lease Payable Dr	$320,000.00
	To Cash		$320,000.00
	(To record lease payment)
30-Jun-16	Interest expense Dr	$196,626.00
	Lease Payable Dr	$123,374.00
	To Cash		$320,000.00
	(To record lease payment)
30-Jun-17	Interest expense Dr	$184,288.00
	Lease Payable Dr	$135,712.00
	To Cash		$320,000.00
	(To record lease payment)