HA3011 Advanced Financial Accounting - Assignment 2

Week 8 – Question 3 (10 marks)

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:

1. Determine the present value of minimum lease rental payment. (5 Marks)
2. Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following; (5 Marks)

1. Transfer of control
2. Payment of annual payments for 2015 and 2016.