On 1 July 2020, Cooper Ltd leased a plastic-moulding machine from Jersey City Ltd. The machine cost Jersey City Ltd $260,000 to manufacture and had a fair value of $302,035 on 1 July 2020. The lease agreement contained the following provisions: Lease term 4 years Annual rental payment, in advance on 1 July each year $81,500 Residual value at end of the lease term $30,000 Residual guaranteed by lessee nil Interest rate implicit in lease 8% The lease is cancellable only with the permission of the lessor. The expected useful life of the machine is 6 years. Cooper Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $1500 to cover the costs of maintenance and insurance paid for by the lessor. Instructions: a)Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting standard. b) Prepare the lease payment schedule for the lessee (show all workings)
On 1 July 2020, Cooper Ltd leased a plastic-moulding machine from Jersey City Ltd. The machine cost Jersey City Ltd $260,000 to manufacture and had a fair value of $302,035 on 1 July 2020. The lease agreement contained the following provisions: Lease term 4 years Annual rental payment, in advance on 1 July each year $81,500 Residual value at end of the lease term $30,000 Residual guaranteed by lessee nil Interest rate implicit in lease 8% The lease is cancellable only with the permission of the lessor. The expected useful life of the machine is 6 years. Cooper Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $1500 to cover the costs of maintenance and insurance paid for by the lessor. Instructions: a)Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting standard. b) Prepare the lease payment schedule for the lessee (show all workings)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On 1 July 2020, Cooper Ltd leased a plastic-moulding machine from Jersey City Ltd. The machine cost Jersey City Ltd $260,000 to manufacture and had a fair value of $302,035 on 1 July 2020. The lease agreement contained the following provisions:
Lease term
4 years
Annual rental payment, in advance on 1 July each year
$81,500
Residual value at end of the lease term
$30,000
Residual guaranteed by lessee
nil
Interest rate implicit in lease
8%
The lease is cancellable only with the permission of the
lessor.
The expected useful life of the machine is 6 years. Cooper Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $1500 to cover the costs of maintenance and insurance paid for by the lessor.
Instructions:
a)Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting standard.
b) Prepare the lease payment schedule for the lessee (show all workings)
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