Question 3 OR (b)

Journal entries for a financial lease in the lessee's books

3 marks

Time to write: About 6 minutes

From an older CBCS paper

Question

Question 3 OR (b) · 3 marks

In the case of a Financial Lease, give the Journal entries in the Lessee's books. 3

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

6 minfor 3 marks

Read from the question

Journal entriesEach entry: the date, the debit and credit lines, and a one-line narration.

Write it in this order

1 Recognition at inception 1 mark 2 min
2 Finance charge and payment entries 1 mark 2 min
3 Depreciation and transfer to profit and loss 1 mark 2 min

123

Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

At the inception of a finance lease the lessee recognises the leased asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments. Each payment is split between the finance charge and the reduction of the liability, the finance charge giving a constant periodic rate on the outstanding liability; the asset is depreciated on the lessee's normal policy.

#	Event	Journal entry
1	At inception	Leased Asset A/c Dr. To Lessor (Lease Liability) A/c (lower of fair value and PV of minimum lease payments)
2	Initial direct costs, if any	Leased Asset A/c Dr. To Bank A/c
3	Finance charge for the period	Finance Charges (Interest) A/c Dr. To Lessor A/c
4	Payment of lease rent	Lessor A/c Dr. To Bank A/c (part interest, part reduction of the liability)
5	Depreciation	Depreciation A/c Dr. To Leased Asset A/c
6	Year end	Profit and Loss A/c Dr. To Finance Charges A/c and To Depreciation A/c

The lease liability is shown separately in the balance sheet (current or long-term), not deducted from the asset.

Where the 3 marks sit

#	Component	Marks
1	Recognition at inception	1
2	Finance charge and payment entries	1
3	Depreciation and transfer to profit and loss	1
	Total	3

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