Question

Lease accounting

Assume rhe following

1. A 3-year lease in initiated on January 1, X1 for equipment having an expected economic life of 5 year and a fair value of S144.288
2. Three annual lease payments $52,000 are required beginning January 1, X1. Two thousand dollars of the lease pavments are to cover various expenditures of the lessor related to property taxes and insurance.
3. The lease agreement includes a bargain purchase option whereby the lessee can purchase the equipment for $10,000 on December 31, X3. The lessee expects the equipment to have a residual value of $1.000 by December 31. X5.
The lessee's incremental borrowing rate is 10% which reflects the lessor's implicit rate of return on the lease

Prepare all the necessary journal entry.

Answer 1

	The leasee should use a single accounting model for all type of lease. The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest (i.e.,10% p.a. in this case)or incremental borrowing rate(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject to depreciation on the straight-line basis over the lease term of 3 year.
	The leasee shall record the lease liability and right in use asset at the Present value of Lease payment and expected residual value as calculated below.
	Year	Payments (Cash flows)	Present Value Factor @10%p.a.	Discounted Cash flows/ Present value
	1	$                                                   50,000.00	1.00000	$                              50,000
	2	$                                                   50,000.00	0.90909	$                              45,455
	3	$                                                   50,000.00	0.82645	$                              41,322
	3 end	$                                                   10,000.00	0.75131	$                                7,513
	Total	$                                                     1,60,000		1,44,290
		Lease liability	$                1,44,290
		Right of Use asset	$                1,44,290
		Depreciation expense p.a.	$                    48,097
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease liability@12%	Reduction of lease Liability	Lease liability
0	$                                     -	$                                                                 -	$                             -	$                           1,44,290
1	$                            50,000	$                                                                 -	$                    50,000	$                              94,290
2	$                            50,000	$                                                           9,429	$                    40,571	$                              53,719
3	$                            50,000	$                                                           5,372	$                    44,628	$                                9,091
4	$                            10,000	$                                                              909	$                      9,091	$                                       -
		In the books of Lessee
		Journal Entries
	Year	Acccount & Explainations	Debit	Credit
	01-01-2001	Right of Use Asset	$                 1,44,290
		Lease liabilty		$                           1,44,290
		(To record initially recognise the lease-related asset and liability .)
	01-01-2001	Lease liabilty	$                    50,000
		Executory Cost expense	$                      2,000
		Cash		$                              52,000
		(To record lease payment)
	31-12-2001	Interest expense	$                      9,429
		Interest Payable		$                                9,429
		(To record interest expense)
	31-12-2001	Depreciation expense	$                    48,097
		Accumulated depreciation-ROU asset		$                              48,097
		( To record depreciation expense on the ROU asset)
	01-01-2002	Lease liabilty	$                    40,571
		Interest Payable	$                      9,429
		Executory Cost expense	$                      2,000
		Cash		$                              52,000
		(To record lease payment)
	31-12-2002	Interest expense	$                      5,372
		Interest Payable		$                                5,372
		(To record interest expense)
	31-12-2002	Depreciation expense	$                    48,097
		Accumulated depreciation-ROU asset		$                              48,097
		( To record depreciation expense on the ROU asset)