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FABS Ltd acquired an item of equipment and entered into a non-cancellable lease agreement with MBC Equipment Ltd on 1 January 2019. The lease consists
FABS Ltd acquired an item of equipment and entered into a non-cancellable lease agreement with MBC Equipment Ltd on 1 January 2019. The lease consists of the following:
- Date of inception: 1/1/19
- Duration of lease: 5 years
- Life of leased asset: 6 years
- Lease payments (annual): $250,000 (annual) which includes $30,000 for maintenance and insurance costs per annum.
- Guaranteed residual value
(Added to final payment): $70,000
- Interest rate: 14%
Required:
- Determine the present value of minimum lease rental payment. (2 Marks)
- Prepare the journal entries for FABS (the Lessee) using the Net Method for the following (6 marks)
- Transfer of control
- Payment of annual payments for 2019 and 2020.
- In your own words, explain how do we account for service costs that are included within a contract to lease an asset? (3 marks)
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