On January 1, 2014, X Ltd. signed a 4 years non-cancellable contract to lease a computer from Y Ltd. requiring equal rental payments of $26,720 at the beginning of each year. The economic life of the asset is 5 years and at the end of the lease period there will be a bargain purchase option for the lessee. The cost and fair value of the computer was $90,000 & $100,000 respectively and the amount of the unguaranteed residual value is $10,000. X Ltd. has an incremental borrowing rate of 12% but has no knowledge that Y Ltd. used a rate 10% in setting annual rentals.

Collection of the rentals is reasonably predictable and there are no important uncertainties regarding future un-reimbursable costs to be incurred by the lessor. At the end of the lease term the computer was purchased by the lessee at a price of Tk. 15,000. PVIFAD (10%,4) – 3.48685; PVIF (10%,4) – 0.68301; PVIFAD (12%,4) – 3.40183; PVIF (12%,4) – 0.63552

Instructions: 

Record the necessary journal entries in the books of Y Ltd.

Answer rating: 100% (QA)

Implicit rate of return specified in the lease agreement has to be used for ... View the full answer