Question

On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20

years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at the
commencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease payment
of $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 June
each year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of
$25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship.
There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136.
Required:
a) Prove that the interest rate implicit in the lease is 10 per cent. (2 marks)
b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020. (4
marks)
c) Provide the entries for the lease in the books of XFinance Ltd as at 1 July 2019, and 30 June 2020

Answer 1

a. FV of Lease Payment=2215552

b. Debit Credit

Recognition of Lease

01-Jul-19 ROU Asset $2215560

Lease Liability $2215560

30-Jun-20 Recording Lease Payment

Lease Liability $225000

Lease Expense $25000

Bank $250000

30-Jun-20 Recording Interest

Interest Expense $199056

Lease Liability $199056

c. Debit Credit

Recognition of Lease

Lease Receivable $2215560

ROU Asset $2215560

30-Jun-20 Recording Lease receipt

Bank $250000

Fisher Ltd $25000

Lease Receivable $225000

30-Jun-20 Maintainace Expense

Lease Expense$25000

Bank $25000

Fisher Ltd $25000

Lease Expense $25000

30-Jun-20 Recording Interest

Lease Receivable $199056

Interest Expense $199056

Step-by-step explanation:

According to the given data Interest rate implict in the lease = 10%

Year Lease Discounting PV of Lease Payment

Factor 10%

0 300000 1.0000 300000

1 225000 0.9091 204545

2 225000 0.8264 185950

3 225000 0.7513 169046

4 225000 0.6830 153678

5 225000 0.6209 139707

6 225000 0.5645 127007

7 225000 0.5132 115461

8 225000 0.4665 104964

9 225000 0.4241 95422

10 225000 0.3855 86747

11 225000 0.3505 78861

12 225000 0.3186 71692

13 225000 0.2897 65174

14 225000 0.2633 59250

15 225000 0.2394 53863

16 225000 0.2176 48967

17 225000 0.1978 44515

18 225000 0.1799 40468

19 225000 0.1635 36789

20 225000 0.1486 33445

a. FV of Lease Payment=2215552

b. Journal Entry In the books of Fisher Ltd.

Debit Credit

Recognition of Lease

01-Jul-19 ROU Asset $2215560

Lease Liability $2215560

30-Jun-20 Recording Lease Payment

Lease Liability $225000

Lease Expense $25000

Bank $250000

30-Jun-20 Recording Interest

Interest Expense $199056

Lease Liability $199056

c.Journal Entry

Debit Credit

Recognition of Lease

Lease Receivable $2215560

ROU Asset $2215560

30-Jun-20 Recording Lease receipt

Bank $250000

Fisher Ltd $25000

Lease Receivable $225000

30-Jun-20 Maintainace Expense

Lease Expense$25000

Bank $25000

Fisher Ltd $25000

Lease Expense $25000

30-Jun-20 Recording Interest

Lease Receivable $199056

Interest Expense $199056