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Pen Wines P/L has leased (lessee) a wine-press on the following terms; Date of entering lease; 1 Jan/15 Duration of lease 5 years Life of
Pen Wines P/L has leased (lessee) a wine-press on the following terms;
Date of entering lease; | 1 Jan/15 | |
Duration of lease | 5 years | |
Life of asset | 6 years | |
Unguaranteed residual value | $40,000 | |
Lease payments | inception (at the start) | $60,000 |
Annual payments (5) | $65,000 | |
Implied rate | 11.0 % |
Required: a) Discuss the logic behind requiring some lease payments (e.g. finance leases) to be capitalized while other lease payments (operating leases) must be expensed. b) Determine the Fair Value (rounded off) of the leased asset. c) Journalize the entries for 1/1/2015 to 1/1/2016 (NB: 31 Dec is the year-end).
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