Question

On January 1, Year 1, lessor leases equipment to lessee. Data on the lease: Equipment fair value and lessor's book value, $25,771 (asset is new) Lessor's implicit rate and lessee's implicit borrowing rate, 8% Lease payments due each December 31 through Year 3 (three-year lease term) Useful life of equipment, three years (no residual value) Payments are due at the end of the year (ordinary annuity).

1. Lessor's Calculation of Lease Payments with No Residual Value

2. Lessee's Calculation of Present Value of Minimum Lease Payments

3. Lessee Amortization Schedule of the Lease Liability.

4. Journal Entry: Lessee Inception and Year 1 Interest and Amortization

5. Journal Entry: Lessee Years 2 and 3 Interest and Amortization

Answer 1

Answer :-1

Present value of annuity factor for 3 years

Annuity PV Factor = [1−(1+i)^−n​] / i

where

i = Interest rate

n - No. of years

Therefore, present value annuity for 3 years at 8% = 2.5771

The lease term is equal to the estimated useful life of the asset. therefore lease can be considered as Finance lease.

Annual Lease payments = Cost of the Asset / Present value annuity factor = 25,771 /2.5771 = $ 10,000 per annum.

Answer :- 2

Present value of Minimum lease payments = (Lease payments X Pv Annuity factor) + (Guaranteed residual value X Pv factor)

Year	Particulars	Amount (In $) (A)	Present value factor @ 8%(B)	Present Amount (In $)
1	Lease payments	10,000	0.92593	9,259
2	Lease payments	10,000	0.85734	8,573
3	Lease payments	10,000	0.79383	7,938
	Present value		2.5771	25,771

In the Given case, both Lessors implicit rate and Lesses borrowing rate is equal. Therefore, the Pv of minimum lease payments = Fair value of the asset.

Answer :- 3

Lease Amortisation Schedule

Year	Opening balance	Principal	Interest @ 8%	Annual Lease Payments	Closing balance
1	25,771	7,938	2,061.68	10,000	17,833
2	17,833	8,573	1,426.61	10,000	9,259
3	9,259	9,259	740.74	10,000	0

Answer :- 4 and 5 Journal Entries in the Books of Lessee :-

Year	Particulars	Debit (In $)	Credit (In $)
Year 1	Right of Use Asset	25,771
	Lease Liability		25,771
	(To record the Asset and the corresponding liability)
Year 1	Lease Liability	7,938
	Finance Charge - Lease	2,062
	Cash		10,000
	(To record the payment of lease rent )
Year 1	Amortisation	7,938
	Right to Use Asset		7,938
	(To record the amortisation of used asset)
Year 2	Lease Liability	8,573
	Finance Charge - Lease	1,427
	Cash		10,000
	(To record the payment of lease rent )
Year 2	Amortisation	8,573
	Right to Use Asset		8,573
	(To record the amortisation of used asset)
Year 3	Lease Liability	9,259
	Finance Charge - Lease	741
	Cash		10,000
	(To record the payment of lease rent )
Year 3	Amortisation	9,259
	Right to Use Asset		9,259
	(To record the amortisation of used asset)