Question

Problem 21-03 (Part Level Submission) Blue Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $43,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Blue’s incremental borrowing rate is 9%. Blue is unaware of the rate being used by the lessor. At the end of the lease, Blue has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Blue uses the straight-line method of depreciation on similar owned equipment. What amounts would appear on Blue’s December 31, 2022, balance sheet relative to the lease arrangement?

Answer 1

	Lessee Accounting: Blue Steel
	Balance sheet(Partial)
	31-12-2022
	Liabilities
	Non-Current Liabilities
	Lease liabilty	$                      75,641
	Current Liabilities
	Lease liabilty	$                      33,204
	Interest Payable	$                              -
	Non-Current Asset
	Right-of-Use Asset	$                  1,09,384
		$                  1,09,384

	Lessee Accounting: Blue Steel
	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 or incremental borrowing rate(i.e.,9% p.a. in this case) (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 & expected residual value as the same is guaranteed as calculated below.
	Period	Payments (Cash flows)	Present Value Factor @9%	Discounted Cash flows/ Present value
	1	$                43,000.00	1.00000	$                    43,000
	2	$                43,000.00	0.91743	$                    39,450
	3	$                43,000.00	0.84168	$                    36,192
	4	$                43,000.00	0.77218	$                    33,204
	5	$                43,000.00	0.70843	$                    30,461
	Total	$                  2,15,000		$                 1,82,307
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease liability	Reduction of lease Liability	Lease liability
31-12-2020	$                               -	$                              -	$                             -	$                 1,82,307
31-12-2021	$                      43,000		$                    43,000	$                 1,39,307
31-12-2022	$                      43,000	$                      12,538	$                    30,462	$                 1,08,845
31-12-2023	$                      43,000	$                        9,796	$                    33,204	$                    75,641
31-12-2024	$                      43,000	$                        6,808	$                    36,192	$                    39,448
31-12-2025	$                      43,000	$                        3,551	$                    39,449	$                             -0