HA3011 Tutorial Questions On Advanced Financial Accounting - Assignment 2

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Week 8 – Question 3 (10 marks)

FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following:

  • Date of inception: 1/1/15
  • Duration of lease: 4 years
  • Life of leased asset: 5 years
  • Lease payments (annual): $550 000 (annual) which includes $80 000 for
    Maintenance and insurance costs per annum.
  • Guaranteed residual value
    (Added to final payment): $190 000
  • Interest rate: 7%

Formula for PV of $1 in n periods =1/(1+k)n
Formula for present value of annuity of $1 per period for n periods = 1-1/(1+k)n/k
where, k is the discount rate expressed in decimal


  1. Determine the present value of minimum lease rental payment. (5 Marks)
  2. Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following; (5 Marks)
  1. Transfer of control
  2. Payment of annual payments for 2015 and 2016.

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