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Homework answers / question archive / XYZ Ltd leased an item of machinery for a five year term on 1 October 2020
XYZ Ltd leased an item of machinery for a five year term on 1 October 2020. The present value of the lease liability is $25,975. The interest rate implicit in the lease is 4% and the annual lease payments equal $9,000. Lease payments are made in advance, commencing on 1 October 2020. What is the appropriate journal on 1 October 2020? Date Account Debit Credit 1 October 2020 Right of Use Asset 25,975 Lease Liability 16,975 Cash 9,000 Date Account Debit Credit 1 October 2020 Lease Liability 7,961 Interest Expense 1,039 Cash 9,000 Date Account Name Debit Credit 1 October 2020 Right of Use Asset 16,975 Lease Liability 16,975 None of the above
On 1 July 2020, Connor Ltd purchased equipment for its fair value and then leased it to Violet Ltd. The lease agreement details are as follows. Length of lease 5 years Commencement date 1 July 2020 Annual lease payment, payable 1 July each year commencing 1 July 2020 $15 000 Residual value at the end of the lease term. $6,000 Interest rate implicit in the lease 4% The lease payments include $3,000 paid for insurance and maintenance costs. The residual value is unguaranteed. Required What is the present value of the lease liability on 1 July 2020? (round your answer to the nearest dollar if necessary) $55,559 $53,421 O $60,490 None of the above
Since the lease payment is in advance therefore there is no component of interest in first payment. Right of asset use should be recognized at P.V. of minimum lease payments which is $25,975. Since lease liability is reduced on making payment of $9,000 therefore only $16,975 is credited in lease liability account and rest $9,000 goes to cash account.
Hence option 1 is correct
Right of use Dr. 25,975
Lease liability cr. 16,975
Cash cr. 9,000
Solution:-
Given data are
Annual lease payment = $ 15,000 - $ 3000 = $ 12,000
rate of interest = 4%
Note :- Residual value is unguaranteed so we have to ignore the residual valuer
Requirements - calculate the present value of lease liability
Pv of lease liability = annual lease payment / (1.04) (1.04) (1.04)(1.04)(1.04)
= 12,000 / 4.4518
= $ 53,421
Hence option no ( B) with $ 53,421 is the correct answer
