Question

On 1 July 2019, XYZ Ltd leased a machinery from ABC Ltd to be used to be used in the mining operations. The machinery cost XYZ Ltd $120 307, considered to be its fair value on that same day. The capital/finance lease agreement contained the following provisions: The lease term is for 3 years, commencing on 1st July 2019 The lease is cancellable and with a 10 % charge of the leased asset’s fair value from the lessor Annual lease payment, payable on 30 June each year $40,000 Estimated useful life of machinery 4 years Estimated residual value of the machinery at the end of useful life $6,000 Bargain purchase option that La Ltd can exercise at the end of lease term $15,000 Interest rate implicit in the lease 7% REQUIRED: 1. Calculate the present value of lease payment. 2. Prepare the lease schedules for XYZ Ltd. 3. Prepare the journal entries in the records of XYZ Ltd only for the year ended 30 June 2020.

Answer 1

Given: Lease term=3 years

Fair value of machinery = $120307

Lease payment per year= $40000

Useful life of machinery =4 years

GRV=$15000

ERV at the end of 4th year= $6000

(1) Present valie(pv) of lease payment(MLP)($)

Date	MLP	7%PVfactor	Present value
30/6/2020	40000	0.9346	37384
30/6/2021	40000	0.8734	34936
30/6/2022	40000+15000 (Including GRV)	0.8163	44896.5
TOTAL			117216.5

Leased assets liability should be lower of Fair value of asset or PV of MLP

Therefore, leased assets liability is PV of MLP=$117216.5

(2) Lease schedule for XYZ Ltd.

Date	MLP	Finance charge	Liability	Balance
31/7/2019	-	-	-	117216.5
30/6/2020	40000	8205.16	31794.84	85421.66
30/6/2021	40000	5979.53	34020.48	51401.18
30/6/2022	40000	3598.82	51401.18	-

(3) Journal entry in the books of XYZ Ltd

Year 2020.

Date	Account titles	Dr.	Cr.
31/7/2019	Machinery on lease	117216.5
	ABC Ltd		117216.5
	(Being machinery taken on lease)
30/6/2020	ABC Ltd	31794.84
	Finance charges	8205.16
	Bank (Being interstellar paid with installment)		40000
	Depreciation	27804.125
	Accumulated depreciation (117216.5-6000)/4		27804.125
	(Being depreciation charged
	Income statement	36009.29
	Depreciation		27804.125
	Finance charges		8205.16
	(Being expense transferred to income statement)