On 1 July 20X4 Near Ltd signed a contract to lease a machine from Far Ltd. On the day the lease contract was signed, Far Ltd purchased the machine at fair value. Near Ltd incurred $2,122 to obtain the lease. Far Ltd incurred initial costs of $1,475. The lease agreement included the following provisions. Lease Term 6 years Annual payments from Near Ltd to Far Ltd. The initial payment was made on 1 July 20X4 with subsequent payments made on 30 June each year. $40,000 Amount included in the annual payments to cover the cost of maintenance and repairs that were arranged and paid for by Far Ltd. $3,000 Residual value of the machine at the end of the lease term Amount of the residual value guaranteed by Near Ltd $25,000 $20,000 Amount of the residual value guarantee that is expected to be payable by Near at the end of the lease term $4,000 Interest rate implicit in the lease 4% The expected useful life of the machine with zero residual at the end of the useful life. 8 years At the end of the lease term, the machine was returned to Far Ltd. Required: 1. Prepare a schedule of interest expense and lease payments over the lease term for the lease liability recognised by Near Ltd 2. Prepare the journal entries for Near Ltd from 30 June 20X4 to 30 June 20X5. 3. Calculate the fair value of the machine at the commencement of the lease.
On 1 July 20X4 Near Ltd signed a contract to lease a machine from Far Ltd. On the day the lease contract was signed, Far Ltd purchased the machine at fair value. Near Ltd incurred $2,122 to obtain the lease. Far Ltd incurred initial costs of $1,475. The lease agreement included the following provisions. Lease Term 6 years Annual payments from Near Ltd to Far Ltd. The initial payment was made on 1 July 20X4 with subsequent payments made on 30 June each year. $40,000 Amount included in the annual payments to cover the cost of maintenance and repairs that were arranged and paid for by Far Ltd. $3,000 Residual value of the machine at the end of the lease term Amount of the residual value guaranteed by Near Ltd $25,000 $20,000 Amount of the residual value guarantee that is expected to be payable by Near at the end of the lease term $4,000 Interest rate implicit in the lease 4% The expected useful life of the machine with zero residual at the end of the useful life. 8 years At the end of the lease term, the machine was returned to Far Ltd. Required: 1. Prepare a schedule of interest expense and lease payments over the lease term for the lease liability recognised by Near Ltd 2. Prepare the journal entries for Near Ltd from 30 June 20X4 to 30 June 20X5. 3. Calculate the fair value of the machine at the commencement of the lease.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On 1 July 20X4 Near Ltd signed a contract to lease a machine from Far Ltd. On the day the
lease contract was signed, Far Ltd purchased the machine at fair value. Near Ltd incurred
$2,122 to obtain the lease. Far Ltd incurred initial costs of $1,475. The lease agreement
included the following provisions.
Lease Term
Annual payments from Near Ltd to Far Ltd. The initial payment
was made on 1 July 20X4 with subsequent payments made on
30 June each year.
Amount included in the annual payments to cover the cost of
maintenance and repairs that were arranged and paid for by
Far Ltd.
6 years
$40,000
$3,000
Residual value of the machine at the end of the lease term
Amount of the residual value guaranteed by Near Ltd
$25,000
$20,000
Amount of the residual value guarantee that is expected to be
payable by Near at the end of the lease term
$4,000
Interest rate implicit in the lease
4%
The expected useful life of the machine with zero residual at
the end of the useful life.
8 years
At the end of the lease term, the machine was returned to Far Ltd.
Required:
1. Prepare a schedule of interest expense and lease payments over the lease term for the
lease liability recognised by Near Ltd
2. Prepare the journal entries for Near Ltd from 30 June 20X4 to 30 June 20X5.
3. Calculate the fair value of the machine at the commencement of the lease.
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