Question

Magpie Ltd enters into a non-cancellable two-year lease agreement with Tiger Ltd for an item of machinery on 1 January 2020. Magpie Ltd pays $15,000 on signing the agreement with Tiger Ltd on 1 January 2020. There are eight quarter payments of $10,000, the first being made on 31 March 2020. Included within the $10,000 lease payments is an amount of $1,000 representing payment to the lessor for insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The machinery is expected to have an economic life of five years, after which time it will have a zero-salvage value. There is a purchase option Magpie Ltd will be able to exercise at the end of the second year for $30,000. If this purchase option is exercised, the machinery will be transferred to Magpie Ltd. The rate of interest implicit in the lease is 12%. Refer to the appendix for the tables of Present Value Factor for a single future amount and Present Value of an ordinary annuity of $1.

Prepare the lease payments schedule for Magpie Ltd from 1 January 2020 to 30 June 2020.

Answer 1

Period	Lease Payments	PV factor @3%	Present Value
0	15,000	1	15,000
1	* 9,000	0.970874	8,738
2	9,000	0.942596	8,483
3	9,000	0.915142	8,236
4	9,000	0.888487	7,996
5	9,000	0.862609	7,763
6	9,000	0.837484	7,537
7	9,000	0.813092	7,318
8	9,000	0.789409	7,105
8	30,000	0.789409	23,682
Total	117,000		101,860
*9,000	=10000-1000
Lease Payments
Schedule
Date	Lease Payment	Interest Expense	Reduction in	Lease liability
		@ 3% of Lease liability	lease liability
1 January 2020.				101,860
1 January 2020.	15,000	-	15,000	86,860
31 March.2020	9,000	2,606	6,394	80,466
30 June.2020	9,000	2,414	6,586	73,880