Question

(A) Modern Ltd has decided to lease a plant from a supplier and has agreed the following terms with the supplier:
Date of inception of lease: 1 July 2019
Duration of lease: 10 years
Life of leased asset: 10 years
Unguaranteed residual value: $15,000
Lease payments: 10,000 at lease inception and $12,000 on 30 June each year for the next 10 years.
Fair value of leased plant at date of lease inception: $97,469
i. Determine the interest rate implicit in the lease (show detailed workings).

ii. Provide a journal to recognise the lease liability at inception of the lease.

Answer 1

(i) From the point of view of lessee,	$
Fair Value of Lease assets (As pv of Minimum lease payment)	97,469
Less: Payment at inception	-10,000
	87,469
Equal lease payment at the end of each year 30 june each year	12,000
PVIFA (Cumulative, n= 10 year at $ 12,000, PV of MPL= $ 87,469)	7.289
(87469/12000)				Rough working
So, Interest rate for 10 year to come at present value of $ 87,469 with PVIFA of 7.29 is	6.21%				@
				Year	6.21	%
				1	0.942
(ii)				2	0.886
	$	$		3	0.835
Lease Asset	87,469			4	0.786
Lease Liability		87,469		5	0.740
(Being lease liability recognised)				6	0.697
				7	0.656
				8	0.618
				9	0.581
				10	0.547	7.287