Answered: On 1 April 20X8 Hop entered a two-year…

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
(a) In accordance with HKFS 16, it requires lessee to recognize a right-of-use asset and a lease liability for all leases. Therefore, Cherry Ltd should recognize the initial measurement of a right-of-use asset and a lease liability as follows: Discount rate Unpaid lease payment -2nd - 5th payment $800,000 x 3.17 Initial measurement of a lease liability Initial measurement of lease liability Lease payment made at commencement date Initial direct cost – commission Initial direct cost – legal fee Initial measurement of a right-of-use asset (b) The lease liability from 2013 to 2017 are as follows: PV 10% 3.17 2,536,000 2,536,000 2,536,000 800,000 20,000 15,000 3,371,000 Lease liability Year Opening balance Lease Lease liability payment after lease Interest expenses 10% Closing balance 1 Jan (a) (b) payment (c) = (a) - (b) 31 Dec (d) = (c) x 10% |(e) = (c) +(d) 2013 2,536,000 2,536,000 253,600 2,789,600 2014 2,789,600 800,000 1,989,600 198,960 2,188,560 2015 2,188,560 800,000 1,388,560…
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On 1 April 20X8 Hop entered a two-year lease agreement for a photocopier and on that date made a payment of £1,000. The second payment is due on 1 April 20X9 which is £2, 000. This has been classified as a 'low value asset. The £1,000 has been recorded as Dr Administration expenses, Cr Bank