On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at thecommencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease paymentof $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 Juneeach 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. b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020.c) Provide the entries for the lease in the book of Xfinance limited as at 1 July 2019, and 30 june 2020.
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.
b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020.
c) Provide the entries for the lease in the book of Xfinance limited as at 1 July 2019, and 30 june 2020.
A lease can be defined as an agreement that allows the lessee to pay a specified amount of money to the lessor in return for the use of the asset such as building, equipment, machine, etc for a particular period of time. The lessee is the one who uses the assets whereas the lessor is the one who gives the asset to the lessee for use.
The two common types of lease are finance (capital) lease and operating lease. Under a finance lease, the risk is born by the lessee whereas, under an operating lease, the risk is born by the lessor.
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