Question

(b) The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.

Inception date January 1, 2020

Lease term 6 years

Annual lease payment due at the beginning of
each year, beginning with January 1, 2020 $150,000

Fair value of asset at January 1, 2020 $760,000

Economic life of leased equipment 7 years

Residual value of equipment at end of lease term,
guaranteed by the lessee $65,500

Lessor’s implicit rate 10%

Lessee’s incremental borrowing rate 12%

January 1, 2020

The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.

Instructions
(i) What is the lease liability for Telsan Company? (4 marks)
(ii) Record the lease on Telsan Company’s books at the date of inception. (4 marks)

Answer 1

Year	Lease payment	Discounting Factor @12%	Present Value	Reamarks
1	150,000	1	150,000	Lease Rental
2	150,000	0.892857143	133,929	Lease Rental
3	150,000	0.797193878	119,579	Lease Rental
4	150,000	0.711780248	106,767	Lease Rental
5	150,000	0.635518078	95,328	Lease Rental
6	150,000	0.567426856	85,114	Lease Rental
7	65,500	0.506631121	33,184	Lease Rental
	965,500		723,901
Lease Liability to be recognised - 7,23,901
Journal Entry :
1	Leased Asset a/c dr	723,901
	To Lease Liability a/c	723,901