Question

In: Accounting

On 1 January 2013, Ford Lease Co. leased a truck with an estimated economic life of...

On 1 January 2013, Ford Lease Co. leased a truck with an estimated economic life of five years to Cubic-Haul for a period of 5 years. The normal selling price of the truck was $47,600. Ford Lease Co. incurred costs of $35,000 in manufacturing the truck. Cubic-Haul agreed to pay monthly rentals of $1,000 at the beginning of each month and was responsible for all maintenance, insurance, etc. Assume that the unguaranteed full residual value of the truck at the end of the lease is $4,000. The interest rate implicit in the agreement is 1% per month.

Required: Applying AASB117, explain how this lease should be accounted for in the financial statements of Cubic-Haul and prepare the general journal entries relating to the lease for the months of January and February in the books of Cubic-Haul.

Solutions

Expert Solution

In this case, all the risks & rewards of ownership are transferred by the Ford Lease Co. to Cubic Haul. Evidence for this is the lease term which is 100% of the asset’s useful life and the present value of the lease payments (excluding the unguaranteed residual value) which accounts for over 95% of the fair value of the asset

PV of Lease Payments = Lease payment per month * PVAF for 60 month @1%

                 Lease payment = $1000 per month

PVAF = 1 + 44.405 = 45.405

   = $1000 * 45.405 = $45405

Therefore , this is a financial lease & obligations under the lease should be capitalised. Note, however, that lease classification involves substantial exercise of professional judgement.

Journal Entries :-

Date

General Journal

Debit

Credit

1 Jan 2013

Machinery under Lease

45405

Lease Liability

45405

Lease Liability

1000

Cash at Bank

1000

1 Feb 2013

Interest Expense

444*

Lease Liability

556*

Cash at Bank

1000

*

Period

Lease Payment

Interest @1%

Principal Repayment

Balance

1 Jan 2013

$45405

1 Jan 2013

1000

1000

44405

1 Feb 2013

1000

444

556

43845


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