On 1 July 2020 Holmes Ltd leased a surveillance van (vehicle) from Watson Ltd. Information in relation to the lease is as follows: The initial lease is for 3 years and cannot be cancelled. However, the lease can be renewed for a further 1 year (for the same annual payment amount). Holmes Ltd is not expected to renew the lease at the end of the 3 years. There are 3 annual payments of $66,000 to be paid on 30 June each year in arrears. The first payment is to be made on 30 June 2021. The interest rate implicit in the lease is 6%. The residual value at the end of the lease term is $50,000. The lessee, Holmes Ltd, has guaranteed $47,000 of this residual value. The van is expected to realise $45,000 at the end of the lease (30 June of final year of lease). Watson Ltd incurred direct costs of $400 in relation to the lease. Costs of $280 were incurred by Holmes Ltd. At the end of the lease there is an option for Holmes Ltd to purchase the van for the guaranteed residual value. However Holmes Ltd is not expected to purchase the van at the end of the lease term (30 June of final year of lease). The fair value of the van at 1 July 2020 is $218,000. The van has an estimated economic life of 5 years, with a scrap value of $28,000. Holmes Ltd applies straight-line depreciation to such vehicles. (i) Identify and describe the components of the lease payments under this lease

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On 1 July 2020 Holmes Ltd leased a surveillance van (vehicle) from Watson Ltd. Information in relation to the lease is as follows:

The initial lease is for 3 years and cannot be cancelled. However, the lease can be renewed for a further 1 year (for the same annual payment amount). Holmes Ltd is not expected to renew the lease at the end of the 3 years.
There are 3 annual payments of $66,000 to be paid on 30 June each year in arrears. The first payment is to be made on 30 June 2021.
The interest rate implicit in the lease is 6%.
The residual value at the end of the lease term is $50,000. The lessee, Holmes Ltd, has guaranteed $47,000 of this residual value. The van is expected to realise $45,000 at the end of the lease (30 June of final year of lease).
Watson Ltd incurred direct costs of $400 in relation to the lease. Costs of $280 were incurred by Holmes Ltd.

At the end of the lease there is an option for Holmes Ltd to purchase the van for the guaranteed residual value. However Holmes Ltd is not expected to purchase the van at the end of the lease term (30 June of final year of lease).
The fair value of the van at 1 July 2020 is $218,000.
The van has an estimated economic life of 5 years, with a scrap value of $28,000. Holmes Ltd applies straight-line depreciation to such vehicles.

(i) Identify and describe the components of the lease payments under this lease

Calculate the present value of the lease payments (you must show all calculations and show the basis for these).
Calculate the amount of the lease asset and lease liability to be recognised at the beginning of the lease by the lessee (you must show all calculations and show the basis for these).

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