FRM Ltd acquired an item of equipment and enters into a non -cancellable lease agreement with FEN Equipment LTd on 1January 2015. The lease consists of the following:Date of inception. 1/1/15Duration of Lease 4 yearsLife of Leased asset. 5 yearsLease payments (annual) $550000(annual) which includes $80000 for Maintenance and insurance costs per annumGuaranteed residual value (Added to final payment). $190000Interest rate. 7%Formula for PV of $1/(1+k)nFormula for present value of annuity of $1 per period for n periods= 1-1/(1+k)n /kWhere k is the discount rate expressed in decimalRequired1. Determine the PV of minimum lease rental payment. 2. Prepare the journal entries for FRM Ltd (The lessee) using the Net method for the following a) Transfer of controlb) Payment of annual payments for 2015 and 2016.

Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period…

Answered: Required 1. Determine the PV of…

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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FRM Ltd acquired an item of equipment and enters into a non -cancellable lease agreement with FEN Equipment LTd on 1January 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) $550000(annual) which includes $80000 for Maintenance and insurance costs per annum
Guaranteed residual value (Added to final payment). $190000
Interest rate. 7%

Formula for PV of $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

1. Determine the PV of minimum lease rental payment.

2. Prepare the journal entries for FRM Ltd (The lessee) using the Net method for the following

a) Transfer of control

b) Payment of annual payments for 2015 and 2016.

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