2.1.1 To determine the class of lease, we need to compare the present value of the lease payments to the fair value of the asset.
The present value of the lease payments is calculated using the implicit interest rate of 13.82%:
PV = R69,600 / (1+0.1382)^1 + R69,600 / (1+0.1382)^2 + R69,600 / (1+0.1382)^3 + R69,600 / (1+0.1382)^4 + R69,600 / (1+0.1382)^5 + R20,000 / (1+0.1382)^5
= R246,321.60
Since the present value of the lease payments is less than the fair value of the asset (R246,321.60 < R250,450), this lease is classified as an Operating Lease.
2.1.2 Journal entries to account for the lease in the books of Sishi Ltd:
Year 1:
Lease expense: Dr 69,600
Creditors - Lease payable: Cr 69,600
Years 2, 3, 4, and 5:
Lease expense: Dr 69,600
Creditors - Lease payable: Cr 69,600
Year 5 (End of Year):
Lease expense: Dr 20,000
Creditors - Lease payable: Cr 20,000
Ownership of the machine is transferred at the end of year 5, so no additional journal entries are required.
Note: The lease expense is recognized evenly over the lease term, which is 5 years in this case.
IAS 17 paragraph 13 states that “Lease classification is made at the inception of the lease…..”
Sishi Ltd entered into a lease agreement in terms of which a machine with a fair value of R250 450 was acquired in exchange for five annual lease payments of R69 600 in arrears. In addition, Sishi Ltd will pay R20 000 at the end of year 5 to take ownership of the machine. The machine is expected to have a total useful life of 5 years. The interest rate implicit in the lease is 13.82% p.a. This is the rate that discounts the future minimum lease payments of R69 600 and the guaranteed payment of R20 000 at the end of year 5 to equal to the fair value of R250 450.
REQUIRED:
2.1.1
What class of lease is this (Finance OR Operating)? Support your answer.
(3)
2.1.2
Prepare the journal entries to account for the lease in the books of Sishi Ltd
(17)
NOTE: For annual lease payments on the first year journal is required
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1 answer
1 answer