Question

Rose Ltd enters into a lease of office equipment for five years. The total value of the equipment when new is $5000. The lease payments are payable on 30 June each year. The first lease payment of $1 500 is payable at commencement of the lease on 30 June 2019. The remaining lease payments are $1 400 in years 2 and 3 and $1 500 in years 4 and 5. In addition to the payments, the lessor provides a lease incentive with a value of $600 at the commencement of the lease. The benefits to the lessee under the lease are expected to arise on a straight-line basis over the term of the lease.

Required

(a) How should Rose Ltd account for this lease transaction?

(b) Prepare the general journal entries in the books of Rose Ltd on 30 June 2019 in accordance with the provisions of AASB 16 ‘Leases’.

Answer 1

Here given that

The value of New Equipment is $ 5000

As per AS 16 - To classify the lease as finance lease or operating lease, the present value of minimum lease payments covers atleast 85% of total value of equipment

Here lets assume that implicit rate of return is 10%

Then Present value of minimum lease payments:

Year	Pvf	Lease payments	PV of Minimum lease payments
1	1	1500	1500
2	0.909	1400	1272.60
3	0.826	1400	1156.40
4	0.751	1500	1126.50
5	0.683	1500	1024.50

Total Value of minimum lease payments is 6080

It exceeds the fair value of Equipment. Hence this lease is considered as Finance Lease

b) Journal entries on 30th June 2019

1. Leased Asset A/c...................Dr 6080

....................To Lease Liability/ Lessor A/c 6080

2. Lease Liability A/c..................Dr 1363

Interest expense A/c .............Dr 137

.........................To Cash/ Bank A/c 1380

.........................To Incentive on LeaseA/c 120 (600/5)

(The Interest expense is assumed based on implicit rate of return is 10%)