Question

Mini Ltd leased a machine from Levi Ltd. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,298,674. There is a bargain purchase option that Mini Ltd will be able to exercise at the end of the fifth year for $260,000.

The terms of the lease are as follows:

• Date of entering lease: 1 July 2019.

• Duration of lease: five years.

• Life of leased asset: six years.

• Lease payments: $320,000 on 30 June each year (starting 30 June 2020).

• Included within the $320,000 lease payments is an amount of $20,000 representing payment to the lessor for the insurance and maintenance of the equipment.

• Interest rate implicit in the lease: 10 per cent.

• The equipment is to be depreciated on a straight-line basis.

Required:

a) Prepare the journal entries to account for the lease in the books of Mini Ltd at 1 July 2019 and for the year ending 30 June 2020.

b) prepare the portion of the statement of financial position for the year ending 30 June 2020 relating to the lease asset and lease liability (current and non-current portion)

Answer 1

LEASE SCHEDULE:

Year	Opening	Principle	Interest	Installment	Closing
1	11,37,236	1,86,276	1,13,724	3,00,000	9,50,960
2	9,50,960	2,04,904	95,096	3,00,000	7,46,056
3	7,46,056	2,25,394	74,606	3,00,000	5,20,661
4	5,20,661	2,47,934	52,066	3,00,000	2,72,727
5	2,72,727	2,72,727	27,273	3,00,000	0

JOURNAL ENTRIES:

Date	Particulars	Debit($)	Credit($)
01-Jul-19	Machinery a/c Dr	11,37,236
	To Lease a/c		11,37,236
	[Being machinery purchased on lease recorded in the amount of lease as given in the table below]
30-Jun-20	Depreciation a/c Dr	1,75,447
	To Machiery a/c		1,75,447
	{being depreciation charged on machinery
	Interest on lease a/c DR	1,13,724
	To Lease a/c		1,13,724
	[Being lease interest charged]
	Lease a/c Dr	3,00,000
	To Bank a/c		3,00,000
	[Being payment of yearly lease rental]
	Maintainence of machinery a/c Dr	20,000
	To Bank a/c		20,000
	[Being maintainence of machinery done]

EXTRACT OF BALANCE SHEET:

Particulars	Amount($)	Amount($)
Non Current Assets:
Property, Plant and Equipment
Machinery	11,37,236
(-)Depreciation	1,75,447	9,61,789
Non Current Liabilities:
Lease		9,50,960