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Determine the present value of minimum lease rental payment

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Reference no: EM132544986

FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following:

Date of inception: 1/1/15

Duration of lease: 4 years

Life of leased asset: 5 years

Lease payments (annual): $550 000 (annual) which includes $80 000 for Maintenance and insurance costs per annum.

Guaranteed residual value (Added to final payment): $190 000

Interest rate: 7% Formula for PV of $1 in n periods =1/(1+k)n

Formula for present value of annuity of $1 per period for n periods = 1-1/(k+1)n divided by k, where, k is the discount rate expressed in decimal

Required:

Question a) Determine the present value of minimum lease rental payment.

Question  b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following;

i. Transfer of control

ii. Payment of annual payments for 2015 and 2016.

Reference no: EM132544986

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