Question
Accounting by lessee and lessor
On 1 July 2009, Silver Ltd leased a processing plant to Emerald Ltd. The plant was purchased by Silver Ltd on 1 July 2009 for its fair value of $467,112. The lease agreement contained the following provisions:
Lease term 3 years
Economic life of plant 5 years
Annual rental payment, in arrears (commencing 30/6/2010) $150,000
Residual value at end of the lease term $90,000
Residual guaranteed by lessee $60,000
Interest rate implicit in lease 7%
The lease is cancellable only with the permission of the lessor.
Emerald Ltd intends to return the processing plant to the lessor at the end of the lease term. The lease has been classified as a finance lease by both the lessee and the lessor.
Required:
(a) Prepare the lease payment schedule for the lessee (show all workings), and the journal entries in the records of the lessee for the year ended 30 June 2011.
(b) Prepare the lease receipt schedule for the lessor (show all workings), and the journal entries in the records of the lessor for the year ended 30 June 2011.
Explanation / Answer
Lease payment schedule for the lessee: Lessee's capitalized amount: Present value of three annual rental payments = $393,645 ($ 150,000 x 2.6243) (2.63 is the pv factor at 7% rate and 3 periods) Present value of guaranteed residual value of 60,000 = 48,978 due three years after date of inception; (60,000 x 0.8163) Lessee's capitalized amount (393,645 + 48,797) = $ 442,623 Date Annual lease payment Interest 7% on liability Reduction of lease Lease liability 30/6/2010 $442,623 30/6/2010 $150,000 no 150,000 292623 30/6/2011 $150,000 20,483 129,517 163,106 30/6/2012 150,000 11417 138583 24,523
Journal entries for the year ended 30th june 2011: Loss on capital lease 11022 Interest expenses 11417 Lease liability 138583 Leased equipment under capital lease 442623 Lessor's lease receipt schedule: Fair market value of the leased equipment = 467,112 Amount to be recovered by lessor through lease payments = 442,623 three begening of the year lease payments to yeild a 7% ( at 7%, 3 periods) (442623 / 2.6243) = $168,663 Lease receivable = Annual lease payment x Pv factor at ( 7% and 3 periods) = 168,663 x 2.6243 Lease receivable = $ 442,623 Date Annual lease payment Interest on liabilities at 7% Lease receivable recovery Lease receivable 30/6/2010 $442,623 30/6.2010 $168,663 no interest 168,663 273,960 30/6/2011 $168,663 19,177 149,486 124,470 30/6/2012 168,663 8,713 159,983
Journal entries for the year ended 30th june 2011: Cash 1102 Gain on sale of leased equipment 1102
Loss on capital lease 11022 Interest expenses 11417 Lease liability 138583 Leased equipment under capital lease 442623 Lessor's lease receipt schedule: Fair market value of the leased equipment = 467,112 Amount to be recovered by lessor through lease payments = 442,623 three begening of the year lease payments to yeild a 7% ( at 7%, 3 periods) (442623 / 2.6243) = $168,663 Lease receivable = Annual lease payment x Pv factor at ( 7% and 3 periods) = 168,663 x 2.6243 Lease receivable = $ 442,623 Date Annual lease payment Interest on liabilities at 7% Lease receivable recovery Lease receivable 30/6/2010 $442,623 30/6.2010 $168,663 no interest 168,663 273,960 30/6/2011 $168,663 19,177 149,486 124,470 30/6/2012 168,663 8,713 159,983
Journal entries for the year ended 30th june 2011: Cash 1102 Gain on sale of leased equipment 1102 Cash 1102 Gain on sale of leased equipment 1102 Date Annual lease payment Interest 7% on liability Reduction of lease Lease liability 30/6/2010 $442,623 30/6/2010 $150,000 no 150,000 292623 30/6/2011 $150,000 20,483 129,517 163,106 30/6/2012 150,000 11417 138583 24,523