The chief operations officer (COO) of Frozen Ltd plans to lease refrigerated trucks from Cool Trucks Ltd. Cool Trucks offers to enter into a non-cancellable lease agreement starting on 30/6/2017.

The following are the provisions of the lease agreement:

The fair value of the office furniture equipment is $94,907 at 30 June 2017.

The present value of the minimum lease payments is: $94,626.

The lease term is for 5 years and the economic life of the vehicle is 6 years.

The annual lease payments are made in advance with $23,000 due immediately and annual payments of $23,000 on 30 June 2018, 2019, 2020 and 2021.

Annual executor costs borne by Frozen Ltd amount to $3,000.                                                                   

The contract specifies that Frozen Ltd will have to guarantee 95% of the residual value of $7,500 at the end of the lease term on 30 June 2022. The estimated residual value at the end of the asset’s useful life is $6,000.

The COO of Frozen Ltd does not expect that the trucks will be needed after the lease term expires.

The interest rate implicit in the lease is 6%.

                                                                                            

Required:           

Prove that the interest rate implicit in the lease is 6% and explain the purpose of the implicit interest rate to the COO.  

Prepare a schedule of the lease payments to be made by Frozen Ltd for the duration of the lease.         

Answer rating: 100% (QA)

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