Question

Question 3 Topic: Leases (for lessors) ACCT Corp. is a manufacturer of truck trailers. On 1 January 2020, ACCT Corp. leased a trailer to a customer under a six-year lease agreement. The following information about the lease and the trailers is provided:

1. Equal annual payments of $10 816 are due on 31 December each year. The interest rate implicit in the lease is 8%.

2. The lease can be cancelled by the customer upon payment of a penalty of $40,000.

3. There is a purchase option that the customer will be able to exercise at the end of the sixth year, for $2 000. The estimated fair value of the trailer at the end of the sixth year is $10 000.

4. The fair value of the trailer is $51,260. The cost of a trailer to ACCT Corp. is $45,000. The trailer has an expected useful life of nine years.

REQUIRED: (1) What type of lease is this for the lessor? Provide explanation and justification for your classification considering AASB 16.

(2) Prepare the journal entries for the lessor from 1 January 2020 to 31 December 2020 (the reporting period end of ACCT Corp.) to record the lease arrangement.

Answer 1

We need to find the PV of the minimum lease paymnet .
Implicit interest rate =8% pa
No of Lease paymnets =6
Bargain purchase at the end of sixth year =$2,000
PV Annuity factor @8% for 6 years =4.623
PV factor @8% for 6 years =0.630
PV of Min Lease Payments
Cash flow	Payment	PVIF/PV Factor	PV of Cash flows
Annual Lease payment Year 1-6	$            10,816.00	4.623	$               50,002.37
Bargain Purchase	$              2,000.00	0.630	$               1,260.000
Total Amount			$               51,262.37

So PV of Minimum Lease paymnets =	$            51,262.37
Fair Value of the Trailer	$            51,260.00
So PV of Minimum Lease paymnets = Fair Value
Ans 1.
This is a sales -Type lease. ACCT Corp will recognize a profit of $6260 ($51260-$45000) in Year 2020
while selling the truck. After that , the Lease will be treated as Financial Lease for the following reasons.
The lease is Financial lease as the PV of Min Lease paymnets is equal to the fair value of the asset,
the lease term covers most of the economic life of the asset, there is bargain purchase option.
and the right to the asset passes to the lessee.

Ans 2.
Lease Amortization
Year	Opening Lease Balance	Rental paymnet	Interest amt	Principal amt	Balance Lease Principal
1	$            51,260.00	$              10,816	$                 4,100.80	$                6,715.20	$     44,544.80
2	$            44,544.80	$              10,816	$                 3,563.58	$                7,252.42	$     37,292.38
3	$            37,292.38	$              10,816	$                 2,983.39	$                7,832.61	$     29,459.77
4	$            29,459.77	$              10,816	$                 2,356.78	$                8,459.22	$     21,000.56
5	$            21,000.56	$              10,816	$                 1,680.04	$                9,135.96	$     11,864.60
6	$            11,864.60	$              12,816	$                    951.40	$              11,864.60	$             (0.00)
		$              66,896	$               15,636.00	$              51,260.00

	Journal Entry in Lessor's Book
Date	Account Title	Dr $	Cr $
01/01/2020.	Lease Receivable	$                 51,260
	Cost of Goods Sold	$                 45,000
	Sales Revenue		$              51,260
	Finished Goods Inventory		$              45,000
12/31/2020.	Cash	$                 10,816
	Lease Receivable		$          6,715.20
	Interest Income		$          4,100.80