Question

Supply Ltd entered into a non-cancellable five-year lease arrangement with Customer Ltd on 1 July 2019. The lease is for an item of machinery. There are to be five annual payments of $315 000, the first being made on 30 June 2020. The implicit interest rate is 12%. The Machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210 000. There is a bargain purchase option that Customer Ltd will be able to exercise at the end of the fifth year for $280 000. Customer Ltd determined that this contract contains a lease.

REQUIRED: Prepare the journal entries in the books of the lessee (Customer Ltd) from 1 July 2019 to 30 June 2020 (the end of the reporting period). Show all working

Answer 1

The Journal Entries of Leased Asset are as follows:

Bargain Option: The bargain option in leasing is a deal that permits the lessee to buy a leased asset at the end of the period. The purchase price in the bargain option is less than the fair market price of the asset. The lessee records the bargain purchase option at the end of the leasing period.
Hence, the bargain purchase option will be recorded at the end of 5th year, not in the year 2019 to 2020.