Question
In: Accounting
10.15 - On 1 July 2019, Cosway Ltd purchased equipment for its fair value and then...
10.15 -
On 1 July 2019, Cosway Ltd purchased equipment for its fair value and then leased it to Valley Ltd, incurring $2548 in costs to prepare and execute the lease document. Valley Ltd incurred $1935 in costs to negotiate the agreement. The equipment is expected to have an economic life of 6 years, after which time it will have a residual value of $6000. The lease agreement details are as follows.
| Length of lease | 5 Years |
| Commencement date | 1 July 2019 |
| Annual lease payment, payable 1 July each year commencing 1 July 2019 | $15,000 |
| Residual value at the end of the lease term, of which 50% is guaranteed by Valley Ltd | $12,000 |
| Interest rate implicit in the lease |
6% |
All insurance and maintenance costs are paid by Cosway Ltd and amount to $3000 per year and will be reimbursed by Valley Ltd by being included in the annual lease payment of $15 000. The equipment will be depreciated on a straight?line basis. It is expected that Valley Ltd will return the equipment to Cosway Ltd at the end of the lease.
Required
1. Calculate the fair value of the leased equipment at 1 July 2019.
2. Prepare the journal entries to account for the lease in the books of Valley Ltd for the year ended 30 June 2020.
Solutions
Expert Solution
| Date | Lease Rental Amount | PV factor @ 6% | PV | ||||
| 01.07.2019 | 12000 | 1 | 12000 | ||||
| 01.07.2020 | 12000 | 0.94 | 11,321 | ||||
| 01.07.2021 | 12000 | 0.89 | 10,680 | ||||
| 01.07.2022 | 12000 | 0.84 | 10,075 | ||||
| 01.07.2023 | 12000 | 0.79 | 9,505 | ||||
| Guaranteed Residual value at the end of
lease term (12000*50%) |
6000 | 0.79 | 4,740 | ||||
| Fair Value of leased equipment as on 01.07.2019 | 58,321 | ||||||
| Note - Expenses incurred at the beginning of lease will not be considered in calculating the PV of the lease | |||||||
| 2) The lease rental amount will be net of expenses reimbursed | |||||||
| 3) Only guranteed residual value will be considered as recovery for computing the lease value | |||||||
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