Calculate the present value of minimum lease payments

Assignment Help Accounting Basics

Reference no: EM132220896

LEASES QUESTION - This question is made up of two (2) parts. Both are compulsory.

Part A - Briefly explain three possible adverse effects on a lessee entity's financial statements arising from the classification of a lease arrangement as a finance lease.

Part B - Kiwi Ltd leased an asset to Link Ltd on 1 April 2015. The lease was for an item of machinery that at the inception of the lease had a fair value of $76,800.

The terms of the lease included the following details:

Date of entering the lease	1-Apr-15
Duration of the lease	3 years
Economic life	6 years
Salvage value at end of life	Nil
Guaranteed residual value	Nil
Lease payments are made on 31 March each year commencing 31 March 2016	31,000
Fair value of the leased asset	$76,800
Implicit interest rate	7% p.a.

Included within the lease payment is an amount of $1,750 representing payment to the lessor for the insurance and maintenance of the machinery. Both companies use straight line depreciation for similar assets.

Required

a) Calculate the Present Value of Minimum Lease Payments for this lease.

b) Complete the repayment schedule provided in the Yellow Answer Booklet for the Lessee-Link Ltd.

c) Provide the journal entries associated with the leased machinery for the lessee at 1 April 2015, and 31 March 2016 (at the end of the first year). Narrations are not required.

Reference no: EM132220896

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