ACC613: Lecture 4: Leases – Tutorial

1. Rankin Ltd has entered into an agreement to lease an item of equipment that produces teddy bears.
The terms of the lease are as follows:
 Date of entering the lease: 1 July 2014
 Duration of lease: 10 years
 Life of the lease asset: 10 years
 There is no residual value
 Lease payments: $5000 at lease inception, $5 500 on 30 June each year (that is, 10 payments).
 Included within the lease payments are executory cost of $500.
 Fair value of the machine at lease inception: $27 470.

REQUIRED
Determine the interest rate implicit in the lease.

2. Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2009.
The lease id for an item of machinery that, at the inception of the lease, has a fair value of $231 140.
The machinery is expected to have an economic life of seven years, after which time it will have no
salvage value. There is a bargain purchase option, which Gregory Ltd will be able to exercise at the
end of the fifth year, for $50 000.

Sanders Ltd manufactures the machinery. The cost of the machinery to Sanders Ltd is $200 000.
There are to be five annual payments of $62 500, the first being made on 30 June 2010. Included
within the $62 500 lease payments is an amount of $6 250 representing payment to the lessor for
the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight
line basis. The rate of interest implicit in the lease is 12 per cent.

REQUIRED
a) Calculate the present value of the minimum lease payments.
b) Prepare the journal entries for the years ending 30 June 2010 and 30 June 2011 in the books of:
i. Sanders Ltd
ii. Gregory Ltd

3. On 1 July 2009, Flyer Ltd decides to lease an aeroplane from France Ltd. The term of the lease is 20
years. The implicit interest rate in the lease is 10 per cent. It is expected that the aeroplane will be
scrapped at the end of the lease term. The fair value of the aeroplane at the commencement of the
lease is $2 428 400. The lease is non-cancellable, returns the aeroplane to France Ltd at the end of
the lease, and requires a lease payment of $300 000 on inception of the lease (1 July 2009) and lease
payments of $250 000 on 30 June each year (starting 30 June 2010). There is residual payment
required.

REQUIRED
a) Provide the entries for the lease in the books of Flyer Ltd as at 1 July 2009.
b) Provide entries for the lease in the books of France Ltd as at 1 July 2009.
c) Provide journal entries in the books of Flyer Ltd for the financial year of the lease (that is the
entry in 20 years’ time)
d) Provide journal entries in the books of France Ltd for the financial year of the lease (that is the
entry in 20 years’ time)