Question

Assume Bruce Ltd (lessee) has entered into a leasing arrangement with Wayne Ltd (lessor) for some equipment. The terms are as follows:

• The lease is for 4 years and commences on the 1 July 2021.

• As an incentive to enter the lease the lessee agrees to a rent free period for the first year of the lease.

• There is no initial payment at the commencement of the lease. There are 3 payments of $45,000 payable on 1 July each year commencing from 1 July 2022.

• The fair value of the equipment was $123,500

• The equipment has an estimated economic life of 8 years, with a residual (scrap) value of $6,500 at the end of its economic life.

• The residual value at the end of the lease term is $13,000.

• The interest rate implicit in the lease is 8% p.a.

• The lessee incurred costs of $900 in direct costs relating to the lease. Costs of $2,000 were incurred by the lessor. •

• Bruce Ltd has guaranteed all of the residual value at the end of the lease term. •

• Bruce Ltd will return the equipment to the lessor at the end of the lease term. •

• It is expected that Bruce Ltd will be not required to pay any of this guaranteed residual value at the end of the lease, as the equipment is expect to realise at least $16,000 at the end of the lease.

Required: (a) Determine the lease term.

(b) Calculate the present value of the lease payments. Show your calculations and basis for these.

(c) Determine the amount of the lease asset and liability initial recognised at the start of the lease. Show your calculations and basis for these.

(d) Prepare a schedule for the lease liability.

(e) Prepare the journal entries required by the lessee for the years ending: 30 June 2022 and 30 June 2023. Show any related calculations.

Answer 1

a. as per the lease term it is an operating lease. as the lease term is less than the economic life of the asset

and the lessee is not required to pay any GRV after completion of the lease.

b. implicit rate of interest is 8%. the 2-4 year annuity factor at 8% is 2.386

ie, 1st year 0.926

2nd year .857

3rd year .794

4th year .735

2.386

the lease payment p.a is $45000. starting from the 2nd year

therefore the Present value for Lease Payment is (45000*2.386) $107370

c. the right-of-use asset and the lease liability will be

Present value of Lease Payment	107370
Direct Costs incurred by lessee	900
Value of Right-of-use asset to be recognized	108270

JV for initial recognition

Right-of-use asset dr. 108270

to, Lease Liability 108270

d. Schedule of lease liability

Year	OB	Finance cost*	Cash payment	CB
1	108270	8662	900	116032
2	116032	9283	45000	80315
3	80315	6425	45000	41740
4	41740	3260	45000	0

Depreciation to be charged per annum (108270/4) $27068

*the lease liability has to be unwound at 8% p.a on the opening balance