Mitchum Ltd entered into a lease agreement on 1 July 2003 to lease equipment on the following terms:

The interest rate implicit in the lease is 6 per cent and the fair value of the leased asset is $13,316. The lease is cancellable at the option of the lessee. The economic benefits provided by the lease asset are expected to be consumed evenly over its life. What are the appropriate entries in the books of the lessee at the end of the reporting period 30 June 2004?
E) None of the given answers.

Question

Mitchum Ltd entered into a lease agreement on 1 July 2003 to lease equipment on the following terms:

The interest rate implicit in the lease is 6 per cent and the fair value of the leased asset is $13,316. The lease is cancellable at the option of the lessee. The economic benefits provided by the lease asset are expected to be consumed evenly over its life. What are the appropriate entries in the books of the lessee at the end of the reporting period 30 June 2004?
E) None of the given answers.

Quizplus · Accepted Answer

Under the operating lease, the lessee should recognize the lease payments as an expense on a straight-line basis over the lease term.

Calculation of annual lease payment: 
PV of lease payments = $12,000
PV of purchase option = $2,000
Total = $14,000

Annual lease payment = $14,000/3 = $4,666.67

Entry at the inception of the lease (1 July 2003):
Lease equipment Dr. $13,316
Lease liability Cr. $13,316

Entry at the end of the reporting period (30 June 2004):
Lease expense Dr. $4,666.67
Lease liability Cr. $4,666.67

Note: The lease liability will be reduced by the amount of lease payment made during the year. However, since no information regarding the lease payment made during the year is given in the question, we assume that no payment has been made, therefore, the full lease payment amount will be recognized as a liability.

Mitchum Ltd Entered into a Lease Agreement on 1 July