Question 4 – Accounting for leases
On 1 July 2017, Fantastic Ltd entered into a lease agreement with Green Power Ltd, agreeing to lease a truck from Green Power Ltd for three years. Details of the lease are as follows:
Fair value of truck at inception of lease $188,995
Residual value at end of lease term $50,000
Residual value guaranteed by lessee $20,000
Annual payments (1st payment due on 30 June 2018) $60,000
Interest rate implicit in the lease 6%
The annual lease payments of $60,000 include reimbursement of insurance and maintenance costs of $5,000. The lease is cancellable, but cancellation will incur a monetary penalty equivalent to 2 years’ lease payments. The estimated useful life of the truck is five years, and it has an estimated residual value of $20,000 at the end of that time. Fantastic Ltd intends to return the truck to Green Power Ltd at the end of the lease term. The truck is to be depreciated using the straight-line method.
Required:
(i) Discuss whether this is a finance lease or operating lease taking into account all the relevant information provided above. Justify your answer.
(ii) Prepare a schedule of lease payments for Fantastic Ltd.
(iii) What is the amount of amortisation in relation to the leased truck to be recorded in Fantastic Ltd’s books for the year ended 30 June 2018? Explain your answer.
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