Question

Delta Dredge P/L enters into a lease (to a lessee) agreement and leases dredging equipment to Wollongong council keep a river mouth clear for boating. The lease consists of the following;

date of inception: 1/7/10

duration of lease: 4yrs

life of asset: 5 yrs

residual value: $120000

lease payments: 165000 annual includes $18000 for maintenance and

insurance costs per annum. $90000 (added to final payment)

interest: 12.5%

fair value: $498016

required: check the rate is correct against FV

do journal entries.

Answer 1

The rate 12.5% is not correct against FV $498,016. Below is the  Fair Value calculation at the interest rate 12.5% discounted at 4 years.

Journal Entries
At the end of 1 Year
			Debit	Credit
Right to use asset a/c			$ 496,581.13
To Lease Liability a/c				$ 496,581.13
(Being lease amount has been recognized)
At the end of 2 Year
Depreciation a/c- ($496,581.13/3 years)			$165,527.04
To Right to use asset a/c				$ 165,527.04
(Being recognized the depreciation of the Right to use Asset over the remaining period of Lease term)
Interest Expenses($496,581.13 * 12.5%)			$ 62,072.64
Lease Liability($165,000-$62,072.64)			$102,927.36
To Cash				165,000.00
Being interest and payment recognized
At the end of 3 Year
Depreciation a/c- ($496,581.13/3 years)			$               165,527.04
To Right to use asset a/c				$ 165,527.04
(Being recognize the depreciation of the Right to use Asset over the remaining period of Lease term)
Interest Expenses($496,581.13 * 12.5%)			$   62,072.64
Lease Liability($165,000-$62,072.64)			$ 102,927.36
To Cash				$ 165,000.00
Being interest and payment recognized
At the end of 4 Year
Depreciation a/c- ($496,581.13/3 years)			$ 65,527.04
To Right to use asset a/c				$ 165,527.04
(Being recognize the depreciation of the Right to use Asset over the remaining period of Lease term)
Interest Expenses($496,581.13 * 12.5%)			$ 62,072.64
Lease Liability($165,000-$62,072.64)			$102,927.36
Maintenance			$ 18,000.00
Insurance			$   90,000.00
To Cash				$ 273,000.00
Being interest, insurance, maintenance cost and payment recognized