HA3011 Tutorial Questions On Advanced Financial Accounting - Tutoring 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

Required:

  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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