Question

On 1 January 2015, Finley entered into an agreement to lease a boat. The term of the lease was four years. Annual lease
payments of Rs. 10,000 are payable in advance. The interest rate implicit in the
lease is 7.5%. Finley is responsible for insuring and maintaining the boat throughout
the term of the lease. the expected salvage value of the boat is 2000.
Instructions:
(a)Tell whether this is operating or finance lease and give two reasons. Also determine present value of minimum lease payments.
(b) prepare lease amortization schedule
(c) prepare depreciation schedule
(d) prepare entries for all years for lessee including deprecaition entries and dispose off entry.
(e) prepare all entries for lessor
(f) prepare T-accounts for lease liability ans allowance for depreciation on behalf of lessee
(g) prepare T-account for lease recievable on behalf of lessor
(h) prepare balance sheet extract for bpth lessor and lessee at december31st, 2016.

the economic life of the boat is 5 years.

Answer 1

Note: Since in the question the cost of the Boat is not given, I assumed the cost is equal to the Present Value of the Minimum Lease payments discounted at a 7.5% rate = $10000*3.6 = $36,000

Since the PV of the minimum lease payments = Cost of the Boat, the lease can be treated as Finance Lease.

Also given that lig=fe of the boat is 5 years, the lease period is 4 years. Hence more than 75% of the life is covered in the lease. Hence the lease is Finance lease.

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