GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

7.2 Finance lease payment schedule and journal entries (1 Page only)
INTERMEDIATE (20 marks: 30 minutes)

On 1 April 20.4, Tex Limited signed a five-year, non-cancelable lease with Bar Limited. The leased
equipment was designed to meet the unique needs of Tex Limited. Annual rent of R10 000 is
payable in advance, starting on 1 April 20.4. The lease contract gave the lessee an option to purchase
the equipment on 31 March 20.9 for R1 (a).

The estimated economic life of the equipment is 10 years, and management of Tex Limited estimated
that the residual value of the equipment at the end of its economic life will be nil. The straight -line
method of depreciation is used by Tex Limited, and its financial year ends on 31 March.

The borrowing rate for Tex Limited on 1 April 20.4 is 10% a year. The present value of an annuity
due of five advance annual payments of R1 at 10% is 4,169865. Bar Limited also considers 10% a
year to be a fair rate of interest.

Ignore taxation.

Required:
(a) Prepare a summary of lease payments and the lessee's interest expense for the lease described
above.

(b) Prepare journal entries for Tex Limited (lessee) relating to the lease for the financial year
ended 31 March 20.5.

NOTE: (a) Treat as immaterial.

Chapter 7: Lessees
© Stainbank, Oakes and Razak
 GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

SUGGESTED SOLUTION – 7.2 INTERMEDIATE (1 Page only)

(a) A summary of lease payments and lessee's interest expense:

Interest Repayment Balance
1.4.20.4 Capital amount 41 699 (a)
1.4.20.4 Cash (10 000) 31 699
31.3.20.5 Interest 3 170 34 869
1.4.20.5 Cash (10 000) 24 869
31.3.20.6 Interest 2 487 27 356
1.4.20.6 Cash (10 000) 17 356
31.3.20.7 Interest 1 736 19 092
1.4.20.7 Cash (10 000) 9 092
31.3.20.8 908 (b) 10 000
1.4.20.8 (10 000) -

(a) (10 000 x 4,169865)

(b) Adjusted due to rounding.

(b) Journal entries for Tex Limited

Calculations: Debit Credit
20.4 Rand Rand
Capitalised leased equipment 41 699
Lease liability 41 699
1 April 20.4: To record finance lease

Lease liability 10 000

Cash 10 000
1 April 20.4: Lease rental for 20.4

20.5
Interest expense 10% x 31 699 3 170
Lease liability 3 170
31 March 20.5: Interest for first year

Depreciation expense 10% x 41 699 4 170

Accumulated depreciation 4 170
31 March 20.5: Depreciation for first year

Chapter 7: Lessees
© Stainbank, Oakes and Razak