Question

On 1 July 2019, Tasman Ltd contracts to lease equipment for five years at an annual rental of $20 000 with the first payment payable immediately. The equipment could have been purchased from the supplier for $80,747. The rate of interest implicit in the lease is 12% and the end of the reporting period is 30 June.

1. Prepare general journal entries for the year ended 30 June 2020, assuming the lease is an operating lease.

2. Prepare general journal entries for the year ended 30 June 2020, assuming the lease is a finance lease.

3. Prepare a schedule showing the division of the lease rental into interest and principal components for the first two years.

Answer 1

Part 3 (schedule showing the division of the lease rental into interest and principal components for the first two years.)

Year	PV factor @ 12%	Remarks
0	1.00000
1	0.89286	= 1 / 1.12
2	0.79719	= 0.89286 / 1.12
3	0.71178	= 0.79719 / 1.12
4	0.63552	= 0.71178 / 1.12
Total	4.03735

Present value (4.03735*20000)

80747

Lessee
Lease Amortization Schedule
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
Jul 1, 2019				80,747
Jul 1, 2019	20,000	0	20,000	60,747
Jul 1, 2020	20,000	7,290	12,710	48,037
Jul 1, 2021	20,000	5,764	14,236	33,801
Jul 1, 2022	20,000	4,056	15,944	17,857
Jul 1, 2023	20,000	2,143	17,857	-

Part 1 : lease is an operating lease.

	operating lease
Date	Accounts titles and explanation		Debit	Credit
Jul 1, 2019	Right of use Asset		80,747
	Lease liability			80,747
	(To record the lease)
Jul 1, 2019	Lease liability		20,000
	Cash			20,000
	(To record lease payment.)
Jun 30, 2020	Lease expenses		20,000
	Lease liability			7,290
	Right of use Asset			12,710
	(To record lease payment and lease expense.)

Part 2 : Lease is a finance lease.

	finance lease
Date	Accounts titles and explanation		Debit	Credit
Jul 1, 2019	Right of use Asset		80,747
	Lease liability			80,747
	(To record the lease)
Jul 1, 2019	Lease liability		20,000
	Cash			20,000
	(To record lease payment.)
Jun 30, 2020	Interest expense		7,290
	Lease liability (sometime, interest payable also used)			7,290
	(To record accrue interest)
Jun 30, 2020	Amortization Expense		16,149
	Right of use Asset			16,149
	(To record amortization expense.) (80747/5)