Lease agreement - accounting for a finance lease

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Reference no: EM133084419

Question: Accounting for a finance lease by the lessee and lessor

On 1 July 2015. Wellington Ltd acquired a new car. The manager of Wellington Ltd. Jack Wellington. went to the local car yard. Hamilton Autos. and discussed the price of a new Racer Special with John Hamilton. Jack and John agreed on a price of $37876. As Hamilton Autos had acquired the vehicle from the manufacturer for $32000. John was pleased with the deal. On discussing the financial arrangements in relation to the car, Jack decided that a lease arrangement was the most suitable. John agreed to arrange for Dunedin Ltd. a local finance company, to set up the lease agreement. Hamilton Autos then sold the car to Dunedin Ltd for $37 876.

Dunedin Ltd wrote a lease agreement. incurring initial direct costs of $534 in the process. The lease agreement contained the following clauses:

Initial payment on 1 July 2015	$13000
Payments on 1 July 2016 and 1 July 2017	$13000
Interest rate implicit in Me lease	6%

The (case agreement also specified for Dunedin Ltd to pay for the insurance and maintenance of the vehicle. the latter to be carried out by Hamilton Autos at regular intervals. A cost of $3000 p.a. was included in the lease payments to cover these services.

Reference no: EM133084419

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