Reference no: EM132554938
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following:
Date of inception: 1/1/15
Duration of lease: 4 years
Life of leased asset: 5 years
Lease payments (annual): $550 000 (annual) which includes $80 000 for maintenance and insurance costs per annum.
Guaranteed residual value (Added to final payment): $190 000
Interest rate: 7%
Formula for PV of $1 in n periods =1/(1+k)n
Formula for present value of annuity of $1 per period for n periods = 1-1/(1+k)n
k where, k is the discount rate expressed in decimal.
Required:
Question a) Determine the present value of minimum lease rental payment.
Question b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following;
i. Transfer of control ii. Payment of annual payments for 2015 and 2016.