In: Finance
Magpie Ltd enters into a non-cancellable two-year lease agreement with Tiger Ltd for an item of machinery on 1 January 2020. Magpie Ltd pays $15,000 on signing the agreement with Tiger Ltd on 1 January 2020. There are eight quarter payments of $10,000, the first being made on 31 March 2020. Included within the $10,000 lease payments is an amount of $1,000 representing payment to the lessor for insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The machinery is expected to have an economic life of five years, after which time it will have a zero-salvage value. There is a purchase option Magpie Ltd will be able to exercise at the end of the second year for $30,000. If this purchase option is exercised, the machinery will be transferred to Magpie Ltd. The rate of interest implicit in the lease is 12%. Refer to the appendix for the tables of Present Value Factor for a single future amount and Present Value of an ordinary annuity of $1
Calculate the lease liability and lease asset.
Given : | |
Interest rate =12% pa=3% per Qtr | |
No of Qtrs in Lease =8 | |
PV Annuity factor @3% for 8 qtrs=(1-1.03^-8)/3%= | 7.0197 |
PV factor @3% for 8 Qtrs =1/1.03^8= | 0.78941 |
Quarterly payment = | $ 10,000 |
Insurance & Maint cost as part of qtrly paymnet= | $1,000 |
We shall not consider the executory payment as | |
Part of Lease payment and will treat as expense separately. | |
So , Quarterly Lease Payment | $ 9,000 |
Let us find the PV of Min Leas payments | |||
Cash flows | Amt | PV Annuity/ PV Factor | PV of Cash flow |
Amount paid on signing agreement Jan 1,2020 | $ 15,000.00 | 1 | $ 15,000.00 |
Eight Quarterly Lease Payments of $9,000 each | $ 9,000.00 | 7.0197 | $ 63,177.23 |
Salvage value at the end of 8 Qtrs | $ 30,000.00 | 0.78941 | $ 23,682.28 |
Total | $ 101,859.51 | ||
So Value of Lease Liability & Right to Use Asset = | $ 101,859.51 |