Question 1

Assume a company (lessee) signs a lease for a forklift with the following predicates:

 Fair value of the forklift is $16,000

 Lease term is 3 years
 Monthly payments of $500/month paid in advance; $50 of the monthly payment is related
to maintenance
 Interest rate a bank would charge this company for a $16,000 loan over 3 years is 4%
 Useful life of the forklift is 5 years.
 Factor for present value is 33.98.
 At the end of the lease term, the company can purchase the forklift for $1,000, which is
the estimated fair value at the end of the lease.
Instructions:
Identify the nature of lease.
Prepare amortization schedule.
Record journal entries in books of both lessee and lessor for first four months.
Assume the case for operating lease then record journal entries in books of both lessee and lessor
for first three months.

Question 2
On 1 April 2009 Shrub Co entered into an agreement to lease a machine that had an estimated
life of four years. The lease period is also four years at which point the asset will be returned to
the leasing company. Shrub is required to pay for all maintenance and insurance costs relating to
the asset. Annual rentals of $8,000 are payable in advance from 1 April 2009. The machine is
expected to have a nil residual value at the end of its life. The machine had a fair value of
$28,000 at the inception of the lease. The lessor includes a finance cost of 10% per annum when
calculating annual rentals. How should the lease be accounted for in the financial statements of
Shrub for the year end 31 March 2010?
Instructions:
Identify the nature of lease.
Prepare amortization schedule.
Record journal entries in books of both lessee and lessor up to second lease payment.
Assume the case for operating lease then record journal entries in books of both lessee and lessor
for first three months.