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National Finance Company, signed a lease agreement with a leading logistic company of Oman on January 2019. The leasing company will provide transport vehicles on lease to the lessee according to following conditions:
a. The term of lease is 5 years. The Lease agreement is non-cancelable and requiring equal rental payment of 1,000,000 OMR at the beginning of each year (Annuity due basis)
b. The transport vehicles have a fair value at the time of Lease Agreement around OMR 40 million and an economic life of 5 years and no residual value.
c. The lessee pays all the executory costs directly to the third party except for the property tax of OMR 3000 per year which is included as a part of its annual payment to National Finance Company.
d. Lessee’s incremental borrowing rate is 12% per year.
e. Lessee depreciates similar transport vehicles that it owns at a straight ling method depreciation.
f. The targeted rate of return expected by the lessor is 10%. The fact is known to the lessee.
1. Identify the type of lease both the companies have entered.
2. Write journal entry for the type of lease.
3. Prepare first lease payment schedule.
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