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Lease PP LLC leased equipment with fair value of the vehicle was 140,000 USD. The...

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Question

Accounting

Lease

PP LLC leased equipment with fair value of the vehicle was 140,000 USD. The lease agreement contained the following:

Lease term

4 years

Annual payment, payable in advance on 30 June each year

40,000 USD

Economic life of vehicle

5 years

Estimated residual value at the end of lease term

8,000 USD

The lease is cancellable, but cancellation will incur a monetary penalty equivalent to 2 years of rental payments.

The lessor incurred 1,500 USD to initiate the lease to PP LLC.

Included in the annual payment is an amount of 2,500 USD to cover reimbursement for the costs of insurance and maintenance paid by the lessor.

PP LLC has no intention to keep the property at the end of the lease term and guaranteed to return the property with residual value of $7,500.

Required:

1. Determine whether the lease is an operating or finance lease per IAS 17.

2. Calculate value at initial recognition for both lessor and lessee and show related journal entries.

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