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

Solution:

Step 1: Lets find the lease liability for the lessee

Calculation of PV of Lease Payments
BPO	280000
Lease Payment (7300-200)	315000
No of periods	5
Interest rate per period	12.00%
PV annuity due Factor @ 12% for 5years	3.60478
PV of Lease Paymenst (315000* PV factor)	1135505
PV of Residual Value (280000*.50835)	158880
PV Lease Payments	1294384

Step 2: Prepare the amortization Schedule

Lease Amortization Schedule
Date	Lease Payment	Interest Expense	Reduction in Lease Liability	Lease Liability
01-07-2019				1294384
30-06-2020	315000	155326	159674	1134710
30-06-2021	315000	136165	178835	955875
30-06-2022	315000	114705	200295	755580
30-06-2023	315000	90670	224330	531250
30-06-2024	315000	63750	251250	280000

Step 3: Journal Entries:

Journal Entries - IN the Books of Lessee
01-Jul-19	Right to use Asset	1294384
	Lease Liability		1294384
	(To record Liability)
30-Jun-20	Lease Liability	159674
	Interest Expense	155326
	Cash		315000
	(To record lease payments )
30-Jun-20	Amortization Expense (1294384/6)	215731
	Right-to- Use Asset		215731
	(To record Amortization Expense)

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