In: Accounting
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.
We need to find the PV of the minimum lease payment . |
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Implicit interest rate =8% pa |
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No of Lease payments =6 |
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Bargain purchase at the end of sixth year =$2,000 |
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PV Annuity factor @8% for 6 years =4.623 |
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PV factor @8% for 6 years =0.630 |
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PV of Min Lease Payments |
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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 |
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Ans 1. |
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This is a sales -Type lease. ACCT Corp will recognize a profit of $6260 ($51260-$45000) in Year 2020 |
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while selling the truck. After that , the Lease will be treated as Financial Lease for the following reasons. |
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The lease is Financial lease as the PV of Min Lease payments is equal to the fair value of the asset, |
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the lease term covers most of the economic life of the asset, there is bargain purchase option. |
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and the right to the asset passes to the lessee. |
Ans 2. |
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Lease Amortization |
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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 |
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Date |
Account Title |
Debit |
Credit |
01/01/2020. |
Lease Receivable |
$ 51,260 |
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Cost of Goods Sold |
$ 45,000 |
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Sales Revenue |
$ 51,260 |
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Finished Goods Inventory |
$ 45,000 |
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12/31/2020. |
Cash |
$ 10,816 |
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Lease Receivable |
$ 6,715.20 |
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Interest Income |
$ 4,100.80 |
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