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.

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

ekkarill92 answered 2 years ago

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