Question

Coronado Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of $39,000 each, beginning January 1, 2017. In addition, Coronado guarantees the lessor a residual value of $20,300 at lease-end. The equipment has a useful life of 6 years. Prepare Coronado’ January 1, 2017, journal entries assuming an interest rate of 11%. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Answer 1

As per Indian accounting standards, Coronado corporation enters in to a lease agreement , it is considered as lessee.

As per IND AS 17,Which deals with lease accounting, The initial recognition of the lease should be made at present value of minimum lease payments or gair value of the asset which ever is lower if the lease taken is financial lease.

One of the indicators to consider the lease is financial lease is the lease covers substantial life of the asset.

From the given facts, the lease covers the entire life period of the asset,hence the lease taken can be classified as finance lease.

And since, the fair value of the asset is not given, the asset and liability at the time of initial recognition should be shown at the present value of minimum lease payments.

Present value of minimum lease payments include discounted value of the annual lease payments and the guaranteed value at the end of the lease term, which can be calculated as below.

Discounted value of annual lease payments @11% is $39,000*4.23054=1,64,991 (4.23054 is the present value annuity factor for 6 years @11%)

Discounted guaranteed value = 20,300*0.53464=10,583

Hence the asset and liability should be recognised at $1,64,991+$10,583=1,75,884

Journal entry for initial recognition as on january 1,2017

Asset a/c Dr. $1,75,884

To Lessor a/c /Lease liabilty a/c $1,75,884