Question

On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are 630,000 (including 30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term. The, present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease is appropriately accounted for as a finance lease by Harris. In its December 31, 2010. balance sheet, Harris should report a current lease liability of:

A. 600,000.
B. 630,000.
C. 409,800.
D. 1,902,000

Answer 1

	Harris company
	Balance sheet(Partial)
	31-03-2010
	Liabilities
	Non-Current Liabilities
	Lease liabilty	$                                                   14,92,200
	Current Liabilities
	Lease liabilty	$                                                     4,09,800	(Option C)

	Lessee Accounting:	Harris company
	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 5 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	$                                               6,00,000.00	1.00000	$                           6,00,000
	2	$                                               6,00,000.00	0.90909	$                           5,45,455
	3	$                                               6,00,000.00	0.82645	$                           4,95,949
	4	$                                               6,00,000.00	0.75131	$                           4,50,789
	5	$                                               6,00,000.00	0.68301	$                           4,09,808
	Total	$                                                  30,00,000		25,02,000
		Lease liability	$              25,02,000
		Right of Use asset	$              25,02,000
		Depreciation expense p.a.	$                5,00,400
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease liability@10%	Reduction of lease Liability	Lease liability
0	$                                     -	$                                                                 -	$                             -	$                         25,02,000
1	$                         6,00,000	$                                                                 -	$                 6,00,000	$                         19,02,000
2	$                         6,00,000	$                                                     1,90,200	$                 4,09,800	$                         14,92,200
3	$                         6,00,000	$                                                     1,49,220	$                 4,50,780	$                         10,41,420
4	$                         6,00,000	$                                                     1,04,142	$                 4,95,858	$                           5,45,562
5	$                         6,00,000	$                                                        54,437	$                 5,45,563	$                                       (0)
		In the books of Lessee
		Journal Entries
	Year	Acccount & Explainations	Debit	Credit
	31-03-2010	Right of Use Asset	$              25,02,000
		Lease liabilty		$                         25,02,000
		(To record initially recognise the lease-related asset and liability .)
	31-03-2010	Lease liabilty	$                 6,00,000
		Executory Cost expense	$                    30,000
		Cash		$                           6,30,000
		(To record lease payment)