Question

Question 5                                                                                                          

Mini Ltd leased a machine from Levi Ltd. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,298,674. There is a bargain purchase option that Mini Ltd will be able to exercise at the end of the fifth year for $260,000.

The terms of the lease are as follows:

• Date of entering lease: 1 July 2019.
• Duration of lease: five years.
• Life of leased asset: six years.
• Lease payments: $320,000 on 30 June each year (starting 30 June 2020).
• Included within the $320,000 lease payments is an amount of $20,000 representing payment to the lessor for the insurance and maintenance of the equipment.
• Interest rate implicit in the lease: 10 per cent.
• The equipment is to be depreciated on a straight-line basis.

1. Prepare the portion of the statement of financial position for the year ending 30 June 2020 relating to the lease asset and lease liability (current and non-current portion).

Answer 1

The basic criteria to classify a finance lease (also known as a capital lease under US GAAP) is where the lessor remains the legal owner of the asset throughout the lease period but all the risk and rewards related to leased assets are transferred to the lessee. The i.e. lessee records a liability and an asset related to leasing in its balance sheets. Also the legal ownership of the leased asset transfers from the lessor to the lessee at the end of the lease.

At inception on 1st July, 2019:

Leased Asset Dr $1,298,674

Leased Liabilty Cr  $1,298,674

Lease Schedule:

Opening	10% Interest	Lease Payment	Closing Balance
1,298,674	129,867.40	300,000	1,128,541.40
1,128,541.40	112,854.14	300,000	941,395.54
941,395.54	94,139.55	300,000	735,535.09
735,535.09	73,553.51	300,000	509,088.60
509,088.60	50,908.86	300,000	259,997.46
259,997.46		260,000	(2.54)

Entries on 30th June, 2020:

Lease Liability Dr $170,133

Finance Expense Dr $129,867

Cash/Bank Cr $300,000

Depreciation Dr $259,735

Lease Asset Cr $259,735

Balance as on 30th June, 2020:

Lease Liability ; $1,128,541 => Current: $187,146

=> Non-Current: $ 941,396

Lease Asset: $ 1,038,939 => Current: $ 259,735

=> Non-current: $ 779,204