Question

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.

Answer 1

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