Workshop questions 11.9, 11.13, 11.15, 11.

22

Week 1 for Lecture 1: Leasing

Chapter 11
9. Determine for each of the following arrangements the manner in which the relevant lease
should be classified, by both the lessor and the lessee, under AASB 117. Give reasons for
your answers.
(a) Company A enters into a non-cancellable lease with a five-year term for an item of
plant, which has an expected useful life of eight years. The lease is renewable for a
further two-year period at commercial rates prevailing at the time of renewal. The
present value of the minimum lease payments is equal to 80 per cent of the fair value
of the leased property at the inception of the lease. The remaining 20 per cent of the
fair value is represented by the guaranteed residual value. The residual value has been
guaranteed by an independent third party, an insurance company, which is unrelated
to either the lessor or the lessee. LO 11.3, 11.5, 11.10
(b) Company B enters into a non-cancellable lease with a seven-year term for an item of
plant, which has an expected useful life of 10 years. The present value of minimum
lease payments is equal to 75 per cent of the fair value of the asset at the date of
inception of the lease. The residual value accounts for the remaining 25 per cent. So
confident is the lessor that the plant will retain its value that it is guaranteeing 50 per
cent of the residual value, with the lessee being responsible for guaranteeing the
remaining 50 per cent of the residual value. LO 11.3, 11.5, 11.10
(c) Company C enters into a non-cancellable lease with a five-year term for a large
commercial vehicle, which has an expected useful life of eight years. The lease is
renewable for a further two years at commercial rates prevailing at the time of
renewal. The present value of minimum lease payments is equal to 65 per cent of the
fair value of the asset at the date of inception of the lease. The residual value is not
guaranteed by the lessee and the vehicle will revert to the lessor. In a separate
agreement the lessee has written a put option, which entitles the lessor to put the
leased property to the lessee in five years time on payment of an amount equal to the
residual value of the lease. LO 11.3, 11.5, 11.10
(d)
Company D enters into a non-cancellable lease for plant with a term of eight years.
The plant has a useful economic life of 12 years. Company D has an option to renew
the lease with the same rental for a further four years, even though market rentals are
expected to increase with inflation over the next decade. The present value of the
minimum lease payments is 70 per cent of the sum of the fair value of the plant.
12 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 lease: 1 July 2015.
Duration of lease: 10 years.
Life of leased asset: 10 years.
There is no residual value.
Lease payments: $5000 at lease inception, $5500 on 30 June each year (that is, 10
payments).
Included within the lease payments are executory costs of $500.
Fair value of the machine at lease inception: $27470.
REQUIRED
Determine the interest rate implicit in the lease.

13 Burt Ltd enters into a non-cancellable five-year lease agreement with Earnie Ltd on 1 July
2015. The lease is for an item of machinery that, at the inception of the lease, has a fair
value of $1 294 384.
The machinery is expected to have an economic life of six years, after which time it
will have an expected residual value of $210 000. There is a bargain purchase option that
Burt Ltd will be able to exercise at the end of the fifth year for $280 000.
There are to be five annual payments of $350 000, the first being made on 30 June
2016. Included within the $350 000 lease payments is an amount of $35 000 representing
payment to the lessor for the insurance and maintenance of the equipment. The equipment
is to be depreciated on a straight-line basis.
REQUIRED
(a) Determine the rate of interest implicit in the lease and calculate the present value of
the minimum lease payments. LO 11.8
(b) Prepare the journal entries in the books of Burt Ltd for the years ending 30 June 2016
and 30 June 2017. LO 11.3, 11.6, 11.7, 11.8
(c) Prepare the portion of the statement of financial position for the year ending 30 June
2017 relating to the lease asset and lease liability. LO 11.4, 11.7
(d) Prepare the journal entries of Burt Ltd for the years ending 30 June 2016 and 30 June
2017 assuming that Burt Ltd classifies the lease as an operating lease.
15 On 1 July 2015, Iselin Ltd signs a non-cancellable agreement to lease land and a building
from Weber Ltd. The lease agreement requires seven annual payments of $375 000, with
the first payment being made on 30 June 2016. Within each of these payments $25 000
represents a payment to Weber Ltd for rates and maintenance of the property. The building
is expected to have a life of only nine years, after which time it will have no salvage value.
At 1 July 2015 the land and building have a fair value of $588 160 and $1 372 370
respectively. The building is expected to have a value (unguaranteed by the lessee) of $500
000 at the end of year 7. The rate of interest implicit in the lease is 10 per cent.
REQUIRED
(a) Prove that the rate of interest implicit in the lease is 10 per cent. LO 11.8
(b) Allocate the lease payments between the land and building. LO 11.6, 11.7, 11.12
(c) Provide the journal entries for the years ending 30 June 2016 and 30 June 2017 for
Iselin Ltd. LO 11.3, 11.5, 11.6, 11.7, 11.8, 11.12
(d) Provide the journal entries for the years ending 30 June 2016 and 30 June 2017 for
Weber Ltd.
22 Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired
the truck at a cost of $180 000. The truck will be painted with Deliveries Ltds logo and
advertising and the cost of repainting the truck to make it suitable for another owner four
years later is estimated to be $40 000. Deliveries Ltd plans to keep the truck after the lease
but has not made any commitment to the lessor to purchase it. The terms of the lease are as
follows:
Date of entering lease: 1 July 2015.
Duration of lease: four years.
Life of leased asset: five years, after which it will have no residual value.
Lease payments: $100 000 at the end of each year.
Interest rate implicit in the lease: 10 per cent.
Unguaranteed residual: $50 000.

 Fair value of truck at inception of the lease: $351 140.

REQUIRED
(a) Demonstrate that the interest rate implicit in the lease is 10 per cent. LO 11.8
(b) Prepare the journal entries to account for the lease transaction in the books of the
lessor, City Vans Ltd, at 1 July 2015 and 30 June 2016. LO 11.6, 11.7, 11.8, 11.10
(c) Prepare the journal entries to account for the lease transaction in the books of the
lessee, Deliveries Ltd, at 1 July 2015 and 30 June 2016. LO 11.6, 11.7, 11.8
(d) On 30 June 2019 Deliveries Ltd pays the residual of $50 000 and purchases the truck.
Prepare all journal entries in the books of Deliveries Ltd for 30 June 2019 in relation
to the termination of the lease and the purchase of the truck.