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

OPERATING LEASE

Operating lease means the asset is not transferred to the lessee and the asset is used for rent payment.The end of the lease period the ownership will be in the hand of lessor.The risk relating to the asset will be in the hand of lessor.

JOURNAL ENTRIES IN THE BOOKS OF LESSOR AS ON 30'TH JUNE 2020

1)The reciept of lease rent.

CASH ACCOUNT DR $ 20000

TO LEASE RECIEVABLE ACCOUNT $ 20000

JOURNAL ENTRIES IN THE BOOK OF LESSEE AS ON 30'TH JUNE 2020

1)The payment of lease rent.

RENT OF LEASE ACCOUNT DR $ 20000

TO CASH $ 20000

FINANCE LEASE

Finance lease is also known as capital lease.The lessor is the legal owner of the asset during the lease period and the lessee has operating control over the asset.after paying the last installment the lessee bcome the owner of the asset.

JOURNAL ENTRIES IN THE BOOKS OF LESSOR AS ON 30'TH JUNE 2020

1)Total amount of lease recievables.

ln the beginning of the lease journal etries are:

LEASE RECEIVABLE ACCOUNT DR $ 80747

TO EQUIPMENT $ 80747

2)first annual rent recieved

CASH ACCOUNT DR $ 20000

TO LEASE RECIEVABLE ACCOUNT $ 20000

3)At the end of 1st and subsequent years.

For receiving the first payment from lessee

CASH ACCOUNT DR $ 20000

TO LEASE RECEIVABLE ACCOUNT $ 12710(20000-7290)

TO INTEREST $ 7290(60747*12/100)

JOURNAL ENTRIES IN THE BOOK OF LESSEE AS ON 30'TH JUNE 2020

1)Total amount of lease payable

For the beginning of lease.

RIGHT OF USE EQUIPMENT ACCOUNT DR $ 80747

TO LEASE PAYABLE ACCOUNT $ 80747

2)At the time of first annual payment.

LEASE PAYABLE ACCOUNT DR $ 20000

TO CASH ACCOUNT $20000

3))At the end of 1st and subsequent years.

For the 1st year annual payment to lessor.

LEASE PAYABLE ACCOUNT DR $ 12710 (20000-7290)

INTEREST EXPENSE ACCOUNT DR $ 7290 (60747*12/100)

TO CASH ACCOUNT $20000

SHEDULE OF LEASE RENTAL INTO INTEREST AND PRINCIPAL

DATE   CALCULATION OF INTEREST TOTAL INTEREST PRINCIPAL BALANCE

1,July 2019 Cash price(equipment) 80747

less:First payment 20000 - 20000 60747

30,June 2020   

first installment paid    60747 * 12/100    7290   12710 48037

30,june 2021

2nd installment paid 48037 *12/100 5764 14236 33801

30,June 2022 33801*12/100 4056 15944 17857

30,june 2023 17857*12/100 2143 17857 --------