Entity 5 leases a machine from ABC ltd. On 1 January 2022. The terms of the leasing contract are as follows: Entity 5 will make a lease payment of £100,000 per year to ABC Ltd at the end of each of the next 5 years. The implied interest rate for the lease is 10% per year. At the end of the lease term, the ownership of the machine would be transferred from ABC Ltd to Entity 5. Entity 5 would normally depreciate similar machines on a straight-line basis over 4 years. Required Show how the lease should be accounted for in Entity 5’s financial statements for the year ended 31 December 2022. If the book value of the machine was £320,000 , how much of profit or loss should be accounted for by ABC Ltd?
Entity 5 leases a machine from ABC ltd. On 1 January 2022. The terms of the leasing contract are as follows: Entity 5 will make a lease payment of £100,000 per year to ABC Ltd at the end of each of the next 5 years. The implied interest rate for the lease is 10% per year. At the end of the lease term, the ownership of the machine would be transferred from ABC Ltd to Entity 5. Entity 5 would normally depreciate similar machines on a straight-line basis over 4 years. Required Show how the lease should be accounted for in Entity 5’s financial statements for the year ended 31 December 2022. If the book value of the machine was £320,000 , how much of profit or loss should be accounted for by ABC Ltd?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Entity 5 leases a machine from ABC ltd. On 1 January 2022. The terms of the leasing contract are as follows:
- Entity 5 will make a lease payment of £100,000 per year to ABC Ltd at the end of each of the next 5 years.
- The implied interest rate for the lease is 10% per year.
- At the end of the lease term, the ownership of the machine would be transferred from ABC Ltd to Entity 5.
Entity 5 would normally
Required
- Show how the lease should be accounted for in Entity 5’s financial statements for the year ended 31 December 2022.
If the book value of the machine was £320,000 , how much of profit or loss should be accounted for by ABC Ltd?
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