10. On 1 July 2008, Copper Coin Ltd leased a photocopier from Silver Note Corp., a company that manufactures, retails and lease copiers. The photocopier has cost Silver Note Corp. $30,000 to make but had a fair value on 1 July 2008 of $35,080. The lease agreement contained the following provisions: Lease term 3 years Annual payment, payable in advance on 1 July each year $ 14,500 Economic life of the copier 4 years Estimated residual value at the end of the lease term when the $3,000 copier is returned to Silver Note Corp. Residual value guaranteed by Copper Coin $ 1,500 Interest rate implicit in the lease 10% The lease is cancellable, provided another lease is immediately entered into. The annual payment included an amount of $2,500 p.a. to reimburse Silver Note Corp. for the cost of paper and toner supplied to Copper Coin Ltd. Silver Note Corp.’s solicitor prepared the lease agreement for a fee of $1,365. On 30 June2011, at the end of the lease term, Copper Coin Ltd retuned the copier to Silver Note Corp., which sold the copier for $3,000. Required: A. Classify the lease for the both the lessor and the lessee, justify your answer. B. Prepare for the lessee; the lease payment schedule.

10. On 1 July 2008, Copper Coin Ltd leased a photocopier from Silver Note Corp., a company that manufactures, retails and lease copiers. The photocopier has cost Silver Note Corp. $30,000 to make but had a fair value on 1 July 2008 of $35,080. The lease agreement contained the following provisions: Lease term 3 years Annual payment, payable in advance on 1 July each year $ 14,500 Economic life of the copier 4 years Estimated residual value at the end of the lease term when the $3,000 copier is returned to Silver Note Corp. Residual value guaranteed by Copper Coin $ 1,500 Interest rate implicit in the lease 10% The lease is cancellable, provided another lease is immediately entered into. The annual payment included an amount of $2,500 p.a. to reimburse Silver Note Corp. for the cost of paper and toner supplied to Copper Coin Ltd. Silver Note Corp.’s solicitor prepared the lease agreement for a fee of $1,365. On 30 June2011, at the end of the lease term, Copper Coin Ltd retuned the copier to Silver Note Corp., which sold the copier for $3,000. Required: A. Classify the lease for the both the lessor and the lessee, justify your answer. B. Prepare for the lessee; the lease payment schedule.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 2013, Gloss Limited signed off on a leasing contract with MR Stationery to lease a photocopier. These detail relate to the lease contract.The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000.The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 yearsAt the end of the lease term, the photocopier must be returned to Gloss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation The lease agreement is annual rental payments beginning January 1 2013Boss Limited desires a 5% rate of return, which is known to MR. MR Stationery’s incremental borrowing rate is 7%.Requirements: the financial year ends on December 31explain the nature of the lease for the lessee using the 5 criteria, prepare the lease schedule for the lessee, prepare the necessary journal entries for January 1 2013 and Dec 31 2013
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