Question

Question 3
COE Limited is a lessee and it has entered into a non-cancellable lease agreement for an equipment on 1 January 2019. The following data is relevant:
1. The lease term is 4 years. Lease payments is $770,000 per annum, payable on 1 January of each year, with the first payment on 1 January 2019.
2. The equipment has a useful life of 6 years with no residual value.
3. COE Limited depreciates similar equipment on a straight-line basis.
4. The interest rate implicit in the lease is 8% per annum.
Present value of an ordinary annuity of 1 for 4 years at 8% = 3.31213
Present value of an ordinary annuity of 1 for 6 years at 8% = 4.62288
Present value of an annuity due of 1 for 4 years at 8% = 3.5771
Present value of an annuity due of 1 for 6 years at 8% = 4.99271
Required:
a. Calculate the present value of the four lease payments on 1 January 2019.

b. Prepare the journal entries related to the lease agreement on 1 January 2019 and 31 December 2019. (Answers should be rounded to the nearest dollar.)

Answer 1

	Calculation of Lease Liability
Year	Payment	Discount Factor	Present Value
1	770,000.00	1.00
2	770,000.00	0.93	712,962.96
3	770,000.00	0.86	660,150.89
4	770,000.00	0.79	611,250.83
			1,984,364.68

	Amortisation Schedule
Year	Opening Liability	Principal Repayment		Interest	Closing Liability
1	1,984,364.68	-	1,984,364.68	158,749.17	2,143,113.85
2	2,143,113.85	(770,000.00)	1,373,113.85	109,849.11	1,482,962.96
3	1,482,962.96	(770,000.00)	712,962.96	57,037.04	770,000.00
4	770,000.00	(770,000.00)	-	-	-

Journal Entries:-

01.01.2019	Right of use Asset		1,984,364.68
		To Lease Liability		1,984,364.68
	Right of use Asset		770,000.00
		To Bank		770,000.00
31.12.2019	Finance Cost		158749.1744
		To Lease Liability		158749.1744
	Depreciation		688591.17
		To Right of Use Asset		688591.17

Depreciation is charged on the lower of life of asset or lease term. In this case the lease term.