Question

On January 1,2020. The leasing co. (The lessor) signed a 5-year, non cancelable lease with Dexter Inc.(the lessee). The terms of the lease are:

(a) Lease payments of $62,700 are made on January 1 of each year.

(b) the annual lease payments include $12,700 of property taxes.

(c)the present value of the annual minimum lease payments is equal to the fair market value of the building at the inception of the lease.

(d) the building has an estimated life of 6 years, with no residual value.

(E) the lessee’s incremental borrowing rate is 6%. The lessor’s rate of return is 5%. The lessor’s rate is known by the lessee.

(f) the lease does not provide for a transfer of title.

(G) the lease does not contain a bargain purchase option.

(H) the lesser will depreciate the leaded asset using straight line depreciation.

a. Prepare, in good form, a lease amortization table for the first three years of the lease.

b. Record. In good form, the necessary journal entries needed in 2022.

Answer 1

STEP 1:-PRESENT VALUE OF MINIMUM LEASE PAYMENT OR FAIR VALUE OF ASSET(By using lessee's incremental borrowing rate @6%):-

Lease Payment(a)*	Present Value Factors@ 6%(b)**	Present Value of leasement(c=a*b)
62,700	1	62,700
62,700	0.943	59,126
62,700	0.890	55,803
62,700	0.840	52,668
62,700	0.792	49,658

So Fair Value of Asset =2,79,955

*Minimum Lease Payment is the amount given by lessee in return for the right to use an asset for an agreed period of time.So total amount given by lessee including property tax is considered as minimum lease payments because it is total amount given by lessee for right to use an asset for agreed period of time.

** In calculating Minimum Lease Payment discount rate is interest rate implicit in tne lease but in this case it is not practicable to determine this, so lessee's incremental borrowing rate should be use which is 6% given.

(a) Lease Amortization Table(For First Three Years of Lease):-

Installment	Opening Balance	Interset Amount@6%	Principle Amount	Closing Balance
1	2,79,955	-	62,700	2,17,255
2	2,17,255	13,035	49,665	1,54,555
3	1,54,555	9,273	53,427	91,855

(b)Journal entries in the books of leasee(For the year 2022):-

Date	Particulars	Dr	Cr
2022 01 Jan	Payment of third intallment Lessor A/c Dr. To Bank	62,700	62,700
31 Dec	Interest due For The Third Year Interest A/c Dr. To Lessor A/c	9,273	9,273
31 Dec	Charging of Depreciation Depreciation A/c Dr.(WN 1)    To Asset A/c	55,991	55,991
31 Dec	Transfer To Profit and loss Account Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c	65,264	9,273 55,991

(WN 1)Depreciation for lessee:-

Straight Line method:-2,79,955/5=55,991

Depreciation is charged as per straight line policy in which fair value of asset is amortised over the term of lease term or useful life of asset whichever is shorter.