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Example 1 and 2 answers please

Example 1 and 2 answers please

FINANCIAL ACCOUNTING
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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Example 1 and 2 answers please

13:12 Finance lease accounting Initial accounting The initial accounting is that the lessee should capitalise the finance leased asset and set up a lease liability for the value of the asset recognised. The accounting for this will be: Dr Non-current assets Cr Finance lease liability (This should be done by using the lower of the fair value of the asset or the present value of the minimum lease payments*.) *Note: The present value of the minimum lease payments is essentially the lease payments over the life of the lease discounted to present value - you will either be given this figure in the Paper F7 exam or, if not, use the fair value of the asset. You will not be expected to calculate the minimum lease payments. Example 1 - Rentals in arrears treatment 00 00 On 1 April 2009 Bush Co entered into an agreement to lease a machine that had an estimated life of four years. The lease period is also four years, at which point the asset will be returned to the leasing company. Annual rentals of $5,000 are payable in arrears from 31 March 2010. The machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $14,275 at the inception of the lease. The lessor includes a finance cost of 15% per annum when calculating annual rentals. * .. ..| 98% | || a How should the lease be accounted for in the financial statements of Bush for the year end 31 March 2010? Example 2 - Rentals in advance treatment On 1 April 2009 Shrub Co entered into an agreement to lease a machine that had an estimated life of four years. The lease period is also four years at which point the asset will be returned to the leasing company. Shrub is required to pay for all maintenance and insurance costs relating to the asset. Annual rentals of $8,000 are payable in advance from 1 April 2009. The machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $28,000 at the inception of the lease. The lessor includes a finance cost of 10% per annum when calculating annual rentals. || How should the lease be accounted for in the financial statements of Shrub for the year end 31 March 2010? ← Upload to OneDrive O = |||
Transcribed Image Text:13:12 Finance lease accounting Initial accounting The initial accounting is that the lessee should capitalise the finance leased asset and set up a lease liability for the value of the asset recognised. The accounting for this will be: Dr Non-current assets Cr Finance lease liability (This should be done by using the lower of the fair value of the asset or the present value of the minimum lease payments*.) *Note: The present value of the minimum lease payments is essentially the lease payments over the life of the lease discounted to present value - you will either be given this figure in the Paper F7 exam or, if not, use the fair value of the asset. You will not be expected to calculate the minimum lease payments. Example 1 - Rentals in arrears treatment 00 00 On 1 April 2009 Bush Co entered into an agreement to lease a machine that had an estimated life of four years. The lease period is also four years, at which point the asset will be returned to the leasing company. Annual rentals of $5,000 are payable in arrears from 31 March 2010. The machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $14,275 at the inception of the lease. The lessor includes a finance cost of 15% per annum when calculating annual rentals. * .. ..| 98% | || a How should the lease be accounted for in the financial statements of Bush for the year end 31 March 2010? Example 2 - Rentals in advance treatment On 1 April 2009 Shrub Co entered into an agreement to lease a machine that had an estimated life of four years. The lease period is also four years at which point the asset will be returned to the leasing company. Shrub is required to pay for all maintenance and insurance costs relating to the asset. Annual rentals of $8,000 are payable in advance from 1 April 2009. The machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $28,000 at the inception of the lease. The lessor includes a finance cost of 10% per annum when calculating annual rentals. || How should the lease be accounted for in the financial statements of Shrub for the year end 31 March 2010? ← Upload to OneDrive O = |||
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