Question

poherty Ltd leased portable cricket nets and equipment from Boon Ltd on the 1July 2014. Doherty Ltd is unsure if it will take possession of the nets and equipment at the end of the lease.The duration of the lease is three years; the asset has a useful life of four years. The lease payments are $4,000 per year with the first payment to be made on 1July 2014. There is a guaranteed residual of $500. The interest rate implicit in the lease is 4%.

Required:

Determine if the arrangement is for a finance lease;and if so,

b Determine the fair value of the leased asset.

c.According to the requirements of AASB 117, prepare general journal entries in the books of the lessee, DohertyLtd for:ii1 July 2014 iii30 June 2015

Answer 1

a. This arrangement is an example of a financial lease for the following reasons:

* In a financial lease, the transfer option at the end of the lease period is there with the lesse.

* And also in a financial lease, the lesse has a purchase option. Therefore, since Doherty Ltd. (Lessee) is unsure if it will take possession of the nets and equipments at the end of the lease, we can conclude that this agreement is a financial lease.

b. Fair value=P*[1-(1+I)^-n]/i

Where (P) annual rent lease= $4000

(i) Implicit rate of interest=4%

(n) Period=3 years

Calculation: 4000[ 1-(1+4/100)^-3]/ 4/100

=4000*[1-(1.04)^-3]/0.04

=4000*[1+1.124864]/0.04

=4000*[2.124864/0.04]

=4000*53.1216= 2,12,486.4

c. (ii)

Date	Particulars	Dr.	Cr.
1/7/2014	Cricket nets and equipements A/C	2,12,486
	To lease liability		2,12,486

( Being an amount of $212,486 recognized for asset and liability)

(iii)

Date	Particulars	Dr.	Cr.
30/6/2015	Lease liability a/c	3,500
	To cash		3,500

(Being cash of $3,500 paid against periodic lease rentals.)