A Case Lease For Finance Lease

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From the perspective of the lessee, this case would be treated as a finance lease because it reflects the relevant requirement in AASB117-Leases for finance lease. AASB 117 define finance lease as a lease that transfers substantially all the risk and rewards incidental to ownership of an asset. Some indicators for a lease to be classified as finance lease are: fair value, non-cancellability, contingent rent, transfer of ownership, bargain purchase option, lease term, economic life, and minimum lease payments (AASB 117 par 10-11). In this case, we can see that some of the indicators of being a finance lease has been satisfied. First indicator is the non-cancellability of the lease. It was indicated in the case that the lease Salohcin Ltd…show more content…
Lastly, it also satisfied the minimum lease payment, where the inception of the lease the present value of the minimum lease payment amounts to at least substantially all of the fair value of the asset which is $349, 160.Therefore, this lease agreement could be treated as a finance lease.
b) Present Value First, as the lease is non-cancellable and at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset (calculations provided below), the lease is a finance lease.
Present value of 4 lease payments of $100,000 discounted at 20% (we eliminate the executory costs) $100,000 x 3.106 =$310,600
Present value of unguaranteed residual $80,000 x 0.482 = $38,560 $349,160

c) Schedule of Lease Receipts for the Lessor

Note: Because the first receipt occurs immediately it is not discounted.

The implicit rate is the rate that, when applied to the minimum lease payments plus unguaranteed residual, causes the sum of these present values to equal the fair value of the asset at lease inception. It is emphasised that unguaranteed residuals are not part of the minimum lease payments because the lessor is not required to make such payments. However, knowledge of the unguaranteed residual is necessary to determine the interest rate implicit in the lease. Using 20 per cent, the present value of the minimum lease payments, plus the unguaranteed residual, is:
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