Raccoon Leasing Company (RLC) enters into a non-cancellable lease agreement on 1st January, 2012 to lease electronic equipment to Electronics…

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Raccoon Leasing Company (RLC) enters into a non-cancellable lease agreement on 1st January, 2012 to lease electronic equipment to Electronics Company Limited (SCL). This lease agreement bears the following terms built therein: a) Lease payments are required at the beginning of each year over the 5 year. b) Economic life of the leased equipment is estimated at 8 years. c) Fair value of the equipment determined on 1st January,2012 at Rs.81,000 and lessor’s cost Rs. 65,000 d) Both the lessor’s implicit rate and the lessee’s incremental borrowing rate are 10%. e) The lessor has bargain-purchase option price of Rs. 4,000 at end of lease term. f) The equipment will revert to RLC at the end of the lease term. The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee uses straight-line depreciation method is used for all of his fixed assets. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor. Requirement a) Calculate the amount of annual lease rentals. (3 Marks) Fair Value = 81000 Installments = 05 years IRR = 10% b) Prepare an amortization schedule separating the above computed rental into interest and principle retired. (8 Marks) c) Prepare extracts as per IAS 17 to be disclosed by the lessee for its balance sheet and income statement for a period of 2013 & 2014. (13 Marks) d) Prepare extracts as per IAS 17 to be disclosed by the lessor for its balance sheet and income statement for the period of 2013 as to Gross Investment on Lease, Net Investment in Lease and unearned finance income. (6 Marks)

 

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