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Financial Accounting Question-

On 1 July 2015, Fast Ltd leased a machine from Furious Ltd. The machine had a fair value of $235,000 on 1 July 2015. The lease agreement contained the following provisions:

  • Non-cancellable lease term - 3 years
  • Economic life of plant - 5 years
  • Annual rental payment, in advance (1st payment 1/07/15) - $80,000
  • Residual value at the end of the lease term - $30,000
  • Residual value guaranteed by the lessee - $12,000
  • Interest rate implicit in the lease - 8%

Fast Ltd intends to return the machine to Furious Ltd at the end of the lease term. The following is extracted from present value and annuity factor tables:

Period/number of payments

Present value of $1 at 8%

Present value of an annuity of $1 at 8%

2

0.8673

1.7833

3

0.7938

2.5771

Required:

a) Prepare a lease schedule for the lessee (round to the nearest dollar).

b) Prepare journal entries in the books of the lessee, for 1 July 2015 and 30 June 2016.

Accounting Basics, Accounting

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