LESSOR ACCOUNTING
Bus Body Limited is a dealer in buses used for inner-city transport. Bus Body
Limited entered into a contract for the lease of a bus to City Buses Limited and
purchased the bus for R250 000 on 1 January 20X1. The bus has a cash sale price
of R320 000. The bus was delivered to City Buses Limited on the same day, the
start of the lease term. It has an estimated useful life of five years and an estimated
residual value of R50 000, guaranteed by City Buses Limited. Lease instalments
of R100 000 are received annually in arrears on 31 December for the five years of
the lease term.
The interest rate implicit in the agreement is 19,8863%. The following present
value table is
provided:
Annuity in arrears of R1 for four years, discounted at 19,8863%
Present value of R1 in 5 years, discounted at 19,8863%
PV factor
2,59432
0,40378
Required:
a) Prove that the implicit interest rate is 19,8863%.
b) Calculate the gross investment in the lease, the net investment in the lease and
the amount of the finance income.
c) Prepare the journal entries in the accounting records of Bus Body Limited for the
year ended 31 December 20X1, using the gross method.
d) Provide an extract from the statement of financial position of Bus Body Limited at
31 December 20X1 showing the finance lease receivable.
e) Provide the disclosure relating to the lease in the notes to the financial statements
of Bus Body Limited.
Ignore tax.
SOLUTION
a) Proof of implicit interest rate
The implicit interest rate in the lease is the discount rate that causes the present value of
•
•
the lease payments; and
the unguaranteed residual value
to equal the sum of the
•
•
fair value of the leased asset; and the
initial direct costs of the lessor.
The present value of the lease payments is calculated as follows:
Arrear payments
Final arrear payment
+ GRV
Annuity of R100 000
discounted at
19,8863% over four
years
R150 000 discounted
at 19,8863% to the
end of the five years
R100 000 x 2,59432
R
259 432
R150 000 x 0,40378
60 568
320 000
The discounted value of R320 000 is the same as the fair value of the leased asset at inception.
Therefore, 19,8863% is the implicit interest rate.
Note that the lease payments include the guaranteed residual value. The unguaranteed residual
value is zero.
b) Calculation of gross investment in the lease, net investment in the lease and the amount of
finance income
Gross investment in
lease (GL)
Net investment in
lease (NL)
Lease payments
receivable by lessor +
Unguaranteed residual
value
GL discounted at
interest rate implicit in
lease
[(500 000 + 50 000)
+0]
[See part (a))]
Unearned finance income
c) Journal entries 01/01/20X1
Inventory (A)
R
550 000
320 000
230 000
Debit
250 000
Credit
250 000
Bank
Purchase of bus
Cost of sales (E)
Inventory (A)
Recognition of cost of selling machine under finance lease
250 000
250 000
Finance lease receivable – gross investment in lease (A)
550 000
230 000
320 000
Unearned finance income (-A)
Sales (I)
Recognition of sale of machine under finance lease
31/12/20X1
Bank (A)
Finance lease receivable – gross investment in lease (A)
Receipt of lease payment from lessee
100 000
100 000
Unearned finance income (-A)
Finance income (I)
Recognition of finance income for the period (W1)
63 636
63 636
c) Extract from statement of financial position BUS BODY LIMITED
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1
20X1 R
Non-current assets
Finance lease receivables
Current assets
Finance lease receivables
(Total lease receivable: 283 636 –
capital portion of lease receivable
due next yr:*43 595)
240 041
(Lease receivable due next yr: 100
000 – future interest income 56
405)
43 595
d) Note disclosure BUS BODY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X1
20X1
R
Finance lease
70 000
Profit or loss on sale of asset under a
finance lease
Finance income on net investment in
lease
Maturity analysis of future lease payments
receivable (W2)
54 372
Gross investment
(undiscounted)
R
Unearned finance
income
R
Net investment
(discounted)
R
100 000
16 588
83 412
100 000
30 424
69 576
100 000
41 965
58 035
150 000
77 387
72 613
Future lease payments expected to be received
in 20X2
in 20X3
in 20X4
in 20X5
Future lease payments
Unguaranteed residual value
Gross investment
450 000
0
450 000
Net investment in finance lease
Carrying amount – beginning of year
Net investment of new leases commenced
during current year
Finance income
Lease payments received
Carrying amount – end of year
166 364
0
166 364
283 636
0
283 636
R
0
320 000
63 636
(100 000)
283 636
Workings
W1: Effective interest rate table
Interest (i)
19,886%
01/01/x1
31/12/x1
31/12/x2
31/12/x3
31/12/x4
31/12/x5
230 000
63 636
56 405
47 735
37 342
24 882
Instalment
Receivable
balance
320 000
(100 000)
(100 000)
(100 000)
(100 000)
(150 000)
550 000
283 636
240 041
187 777
125 119
*1
W2: Maturity analysis
calculation
Lease payment
expected to be received on
31/12/X2
R
100 000
31/12/X3
100 000
31/12/X4
100 000
31/12/X5
150 000
Financial calculator or [100 000 x
(1/ (1,198863)1]
Financial calculator or [100 000 x
(1/ (1,198863)2]
Financial calculator or [100 000 x
(1/ (1,198863)3]
Financial calculator or [100 000 x
(1/ (1,198863)4]
PV
R
Unearned
finance
income
R
83 412
16 588
69 576
30 424
58 035
41 965
72 613
77 387