Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans plc acquired the truck at a cost of $196,000.The truck will be painted with Deliveries Ltd’s logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $56,000. Deliveries Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:
Date of entering lease: 1 July 2019.
Duration of lease: 4 years.
Life of leased asset: 5 years, after which it will have no residual value. Lease payments: $116,000 at the end of each year.
Interest rate implicit in the lease: 10 per cent.
Unguaranteed residual: $66,000.
Fair value of truck at inception of the lease: $412,786
Required:
(a) Demonstrate that the interest rate implicit in the lease is 10 per cent.
(b) Prepare the journal entries to account for the lease transaction in the books of the lessor, City Vans
Ltd, at 1 July 2019 and 30 June 2020.
(c) Prepare the journal entries to account for the lease transaction in the books of the lessee, Deliveries Ltd, at 1 July 2019 and 30 June 2020.
(d) On 30 June 2023 Deliveries Ltd pays the residual of $66,000 and purchases the truck. Prepare all journal entries in the books of Deliveries Ltd for 30 June 2023 in relation to the termination of the lease and the purchase of the truck