1. Business
  2. Accounting
  3. downton ltd signs a noncancellable fiveyear lease on an item...

Question: downton ltd signs a noncancellable fiveyear lease on an item...

Question details

Downton Ltd signs a non-cancellable five-year lease on an item of machinery on 1 July 2018. At the inception of the lease, the machinery has a fair value of $801,060.

The expected economic life of the machinery is six years, when it is expected to have a residual value of nil. There is a bargain purchase option that Downton Ltd, as the lessee, will be able to exercise at the end of the fifth year of the lease for $300,000.

There will be five annual payments of $200,000, the first being made on 30 June 2019. Included within each of the $200,000 payments is an amount of $25,000 which will be paid to the lessor to cover insurance and maintenance on the equipment. There were no initial direct costs associated with the lease. The equipment is to be depreciated on a straight-line basis.

The interest rate implicit in the lease is 12%.

Required:

  1. Prove that the interest rate implicit in the lease is 12%. Show workings.
  2. Prepare a schedule of lease payments for the duration of the lease in the following format.          Round to whole numbers.

Date

Beginning balance

Lease payment

Interest expense

Principal repayment

Closing balance

  1. Prepare the journal entries to record the inception of the lease on 1 July 2018.
  2. Prepare the journal entries on 30 June 2019.   

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution