Lease Agreement Calculations

Posted: August 26th, 2021

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Accounting assignment: Lease Agreement Calculations

Question One(Chapter 17)

1. In respect to the IFRS 16, the nature of the lease agreement is that the leasee will not receive the ownership title after the expiry of the lease term. Nonetheless, the lease agreement is a not capital lease because the exceptions do not apply.However, the lease is considered an operating lease because of the following: title of the lease is not transferred to the leasee, does not include bargain purchase option (BPO), and the present value of the lease payments are not more than 90% of the fair machinery value as shown below. PV = $415,508; FV = $560,000.

$(415,508/560,000) x 100 = 74.2%

• With a machine’s fair value of $560,000 and a lease term of 7 years, the amount of the annual lease payment to Cranbrook will be as follows;

Annual lease payment = 

=

= $80,000

• Calculating the present value (PV) of the minimum lease payment for the leasee (Rossland) depends on the leasee incremental borrowing rate at 11%.

PV = SUM [P/ (1+r) n] + [RV/ (1+r) n]

In this case, P = $80,000; r = 11%; n = 7 years; RV = $80,000. Therefore, the SUM [P/(1+r)n] is the discounted total amounts paid over the lease term based on the formulae.

PV = [80,000/ (1.11)7] + [80,000/ (1.11)7]

= $376,976 + $38,533

=$415,508

• Calculating the present value (PV) of the minimum lease payment for the leasor (Cranbrook Ltd) depends on the desired return on investment at 10%.

PV = SUM [P/ (1+r) n] + [RV/ (1+r) n]

In this case, P = $80,000; r = 10%; n = 7 years; RV = $80,000. Therefore, the SUM [P/ (1+r) n] is the discounted total amounts paid over the lease term based on the formulae.

PV = [80,000/ (1.1)7] + [80,000/ (1.1)7]

= $389,474 + $41,053

=$430,526

• The journal entries for leasee (Rossland) would be for the years 2020 and 2021.

    2020                                                       Lease Contract Account

Date	Account title & explanations	Dr	Cr
Jan 1	Right of Use (ROU) Asset	$415,508
	Lease liability		$415,508

    2020                                                       Interest Expense Accounts

Date	Account title & explanations	Dr	Cr
Dec 31	Interest Expense	$45,706
	Lease liability		$45,706

Interest expense = 11% x $415,508

= $45706

    2020                                           Depreciation Expense Account

Date	Account title & explanations	Dr	Cr
Dec 31	Depreciation Expense	$47,930
	Acc. Depreciation on ROU asset		$47,930

Depreciation Expense = $(415,508 – 80,000)/7

= $47,930

2021                                             First Lease Payment Account

Date	Account title & explanations	Dr	Cr
Jan 1	Lease liability	$80,000
	Cash		$80,000

Lease Liability Account

                                                                              $415,508              Jan 1 2020

                                                                              $ 45,706                Dec 31

                                  Jan 1 2021           $80,000

$461,214

Question Two (Chapter 18)

1. The calculated taxable income for 2019 is as follows;

• A schedule to calculate the deferred tax asset/liability for the temporary differences. With the temporary deductible differences signifying that there would be an anticipated lower taxable income than the accounting income, the company would have to pay fewer taxes later.

• Adjusting journal entries to record income taxes for 2019 has been combined,as shown below. In this scenario, there is no deferred tax liabilitybecause the rate of corporate taxes changed from a higher value of 45% to a lower one at 40%. Indeed, it implies that the company would record an income tax asset deferred in the future.