Question

In: Accounting

ACCT Corp. is a manufacturer of truck trailers. On 1 January 2020, ACCT Corp. leased a...

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) (2)

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

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.

Solutions

Expert Solution

We need to find the PV of the minimum lease payment .

Implicit interest rate =8% pa

No of Lease payments =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 payments =

$            51,262.37

Fair Value of the Trailer

$            51,260.00

So PV of Minimum Lease payments = 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 payments 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 payment

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

Debit

Credit

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

I HOPE IT USEFUL TO YOU IF YOU HAVE ANY DOUBT PLZ COMMENT GIVE ME UP-THUMB. THANKS..


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