Question

ACCOUNTING FOR LEASES   

Mickey’s Garage entered into a non-cancellable, five-year lease agreement on 1 April 2020 for an item of machinery. The machinery is expected to have an economic life of seven years, after which it will have no salvage or residual value and ownership is transferred at the end of the lease. Mickey’s Garage is to make five annual payments of $100,000 (to be made at the end of the year). The rate of interest implicit in the lease is 4%. The fair value of the leased asset is $445182. Mickey’s Garage also spend $10,000 on installation costs for this piece of machinery. Assume a 31 March year-end.

1. Fill-in the below table.

Year	Lease Liability Open	Cash Payment	Interest Expense	Principal Component	Lease Liability Close
1
2
3
4
5

1. Fill-in the below table.

Year	Lease Liability Open	Cash Payment	Interest Expense	Principal Component	Lease Liability Close
1
2
3
4
5

1. Fill-in the below table.

Year	Lease Liability Open	Cash Payment	Interest Expense	Principal Component	Lease Liability Close
1
2
3
4
5

2. Following from above, record any and all journal entries relating to the lease that took place anytime in the first year (i.e. for the year ending 31 March 2021). This includes the initiation of the lease, any payments made, interest, and depreciation. Round to the nearest whole dollar.

3. Following from above, show extracts of the financial position for the leased asset (also known as the right-of-use asset) and lease liability as at the end of the first year of the lease (i.e. for the year ending 31 March 2021). You answer should make it clear where in the balance sheet each component would go.

Statement of Financial Position for Mickey’s Garage as 31 March 2021

Answer 1

PV of the lease Payment = Lease payment * PVIFA,4%,5

Lease payment = 100000

PVIFA,4%,5 = 4.45182

PV of the lease Payment = 100000*4.45182 =

445182

* As the PV of lease payments equals the fair value of machinery at a discount rate of 4%, 4% is the implicit rate of the lease.

1. Fill-in the below table.

Year	Beginning balance	Lease payment	Interest expense	Principal repayment	Closing balance
1	445182	100000	17807	82193	362989
2	362989	100000	14520	85480	277509
3	277509	100000	11100	88900	188609
4	188609	100000	7544	92456	96154
5	96154	100000	3846	96154	0

Interest expense each Year= Beginning balance * 4%

Principal repayment each Year= Lease payment - Interest expense

Closing balance = Beginning balance - Principal repayment

2. Record any and all journal entries relating to the lease that took place anytime in the first year

Date	Account	Debit	Credit
Apr 1, 2020	Leased asset	445182
	Lease liability		445182
Mar 31, 2021	Lease liability	82193
	Interest expense	17807
	Cash		100000
Mar 31, 2021	Depreciation expense (445182/5)	89036.4
	Accumulated depreciation (Leased asset)		89036.4

3. Statement of Financial Position

Statement of Financial Position Mickey’s Garage as 31 March 2021
Assets:
Leased assets	445182
Less: Accumulated depreciation - Leased assets	89036	356146
Liabilities:
Lease liability		362989