Lease is a contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment.
Leasor -> User of Asset
Lessee-> Owner of Asset
Residual value -> Assets value end of lease term
Type of lease
Normally There have two type lease
1.Operating lease
2.Finance lease
Now, how can we know a lease is operating or finance??
Don't wory we can easily Identify a lease is operating or finance.
There have four criteria by using this easily identify a lease is finance lease or operating. This criteria given by IASB
1. The lease transfers ownership of the property to the lessee.
2. The lease contains a bargain-purchase option
3. The lease term is for the major part of the economic life of the asset.
4. The present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset.
Exercise 01 ::
illustrate a finance lease, assume that CNH Capital (NLD) (a subsidiary of CNH
Global) and Ivanhoe Mines Ltd. (CAN) sign a lease agreement dated January 1, 2015,
that calls for CNH to lease a front-end loader to Ivanhoe beginning January 1, 2015. The
terms and provisions of the lease agreement and other pertinent data are as follows.
• The term of the lease is five years. The lease agreement is non-cancelable, requiring
equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis).
• The loader has a fair value at the inception of the lease of $100,000, an estimated
economic life of five years, and no residual value.
• Ivanhoe pays all of the executory costs directly to third parties except for the property
taxes of $2,000 per year, which is included as part of its annual payments to CNH.
• The lease contains no renewal options. The loader reverts to CNH at the termination
of the lease.
• Ivanhoe’s incremental borrowing rate is 11 percent per year.
• Ivanhoe depreciates similar equipment that it owns on a straight-line basis.
• CNH sets the annual rental to earn a rate of return on its investment of 10 percent
per year; Ivanhoe knows this fact
Solution ::
 |
| Lease Amortization schedule |
 |
| Lase journal |
 |
| Lease journal |
Journal for Ivanhoe( lesse)
(Recording the lease)
1-1-25
Executory cost 2000
Lease libality 23981.62
Cash 25981.62
Ivanhoe uses CNH’s implicit interest rate of 10 percent instead of its incremental
borrowing rate of 11 percent because it knows about it.9 Ivanhoe records the finance
lease on its books on January 1, 2015, as follows.
Leased Equipment 100,000
Lease Liability 100,000
Note that the entry records the obligation at the net amount of $100,000 (the present
value of the future rental payments) rather than at the gross amount of $119,908.10
($23,981.62 3 5).
Ivanhoe records the first lease payment on January 1, 2015, as follows.
Property Tax Expense 2,000.00
Lease Liability 23,981.62
Cash 25,981.62
If equipment life increase 5-7 years and value of terminate value is 5000 then journal will be
Equipment ($100,000 1 $5,000) 105,000
Accumulated Depreciation—Leased Equipment 100,000
Leased Equipment 100,000
Accumulated Depreciation—Equipment 100,000
Cash 5,000
