In: Accounting
On 1 July 2017, Webster Motors Ltd acquired equipment under a four-year finance lease agreement. The present value of the lease payments is $431,213. It has an estimated useful life of five years and estimated residual value of $31,213. The implicit rate of interest on the lease was 8% per annum. The lease involved five payments, an initial payment of $100,000 and four annual payments on 30 June each year of $100,000.
Webster Motors Ltd will retain the equipment at the end of the lease.
Required:
a.) | The lease will be classify as Capital Lease because Webster motors ltd with retain the equipment at the end of the lease.The lease liability & right of use assets will be recorded with $431,213. Interest expense will be booked on income statement every year as per schedule below in point b. | ||||||
b.) | Lease Schedule | |||||
Date | Lease Payment $ | Interest Expense @8% | Reduction in lease laibility $ | Lease liability $ | ||
01-07-2017 | 431,213 | |||||
01-07-2017 | 100,000 | - | 100,000 | 331,213 | ||
30-06-2018 | 100,000 | 26,497 | 73,503 | 257,710 | ||
30-06-2019 | 100,000 | 20,617 | 79,383 | 178,327 | ||
30-06-2020 | 100,000 | 14,266 | 85,734 | 92,593 | ||
30-06-2021 | 100,000 | 7,407 | 92,593 | 0 | ||
Total | 500,000 | 68,787 | 431,213 | |||
c.) | Date | Account Titles | Debit $ | Credit $ | ||
30-06-2019 | Lease Liability | 79,383 | ||||
Interest Expense | 20,617 | |||||
Cash | 100,000 | |||||
30-06-2019 | Amortization Expense | 107,803 | ||||
Right of use assets | 107,803 | |||||
(431,213 / 4 ) | ||||||
d.) | Income Statement-30 June 2019 | |||||
Amount in $ | ||||||
Interest Expense | 20,617 | |||||
Amortization Expense | 107,803 | |||||
e.) | Balance Sheet- 30 June 2019 | |||||
Amount in $ | ||||||
Assets | ||||||
Right of use assets | 215,607 | |||||
(431,213 - 107,803 - 107,803 ) | ||||||
Liabilities | ||||||
Lease Liability | 178,327 | |||||