Question

ACCOUNTING FOR LEASES

Mickey’s Garage entered into a non-cancellable, five-year lease agreement on 1 April 2020 for an item of machinery. The machinery is expected to have an economic life of seven years, after which it will have no salvage or residual value and ownership is transferred at the end of the lease. Mickey’s Garage is to make five annual payments of $100,000 (to be made at the end of the year). The rate of interest implicit in the lease is 2%. value of the leased asset is $471,346. Mickey’s Garage also spend $10,000 on installation costs for this piece of machinery. Assume a 31 March year-end.

1. Fill-in the below table.

Year	Lease Liability Open	Cash Payment	Interest Expense	Principal Component	Lease Liability Close
1
2
3
4
5

Type in any workings or justifications to your lease table here

Following from above, record any and all journal entries relating to the lease that took place anytime in the first year (i.e. for the year ending 31 March 2021). This includes the initiation of the lease, any payments made, interest, and depreciation. Round to the nearest whole dollar.

Answer 1

Year	Lease liability opening	Cash Payment	Interest Expense	Principal Component	Lease Liability Close
1	471346	100000	9427	90573	380773
2	380773	100000	7615	92385	288388
3	288388	100000	5768	94232	194156
4	194156	100000	3883	96117	98039
5	98039	100000	1960	98039	0

the value of the leased asset is $471,346 is considered as present value of lease payments discounted at 2%.

Journal entries:

Year 1:

1/4/2020	Gross Asset (Machinery)	471346
	Lease Liability		471346
31/3/2021	Lease Rental Expense (Reduction of Lease Liability)	100000
	Cash (Paid to Lessor)		100000
31/3/2021	Depreciation (Reduction of Gross Asset)	67335
	Depreciation Expense Account		67335

Depreciation:

value of asset =471346

life = 7 yrs

residual value=0

Depreciation =471346/7=67335