On 1 July 2011, Cerise Ltd leased a crane from Azure Ltd. The crane cost Azura L

Question

On 1 July 2011, Cerise Ltd leased a crane from Azure Ltd. The crane cost Azura Ltd $120,697. The lease agreement contained the following provisions:


Lease term 3 years
Estimated useful life of crane 4 years
Annual lease payment, payable on 30 June each year $39,000
Estimated residual value of crane at end of lease term $22,000
Residual value guaranteed by Cerise Ltd $16,000
Interest rate implicit in lease 7%


The lease is cancellable only with the permission of the lessor.

Required:

(a) Classify the lease for Cerise Ltd.
(b) Prepare the lease payment schedule for Cerise Ltd and its journal entries to record the lease for the year ended 30 June 2012.

Explanation / Answer

(a) This is operating lease (b) Schedule for lease payment: Fair market value of the leased asset                                             $120,697 Less: Present value of residual value($16,000*0.816)                   13,056 Amount to be recovered by lessor through lease payments         $107,641 Three periodic lease payaments($107,641/2.624)                       $41,021.7 Journal entries:          Date                      Particulars                           Debit                 Credit            1.                       Lease equipment                   $120,697                                            Lease liability                                          $120,697                        2.                      Rent expense                           $39,000                                                  Cash                                                    $39,000                     Date                      Particulars                           Debit                 Credit            1.                       Lease equipment                   $120,697                                            Lease liability                                          $120,697                        2.                      Rent expense                           $39,000                                                  Cash                                                    $39,000           

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