On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to lease a specialized, state-of-the-art photocopier. The following information relates to the lease contract. 1. The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000. 2. The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 years 3. At the end of the lease term, the photocopier must be returned to the Boss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation (when applicable) 4. The lease agreement requires annual rental payments beginning January 1 2013 5. Boss Limited desires a 5% rate of return which is known to MR. MR Stationery's incremental borrowing rate is 7%. Requirements: (Assume the financial year ends on December 31) a) Discuss the nature of the lease for the lessee using the 5 tests criteria b) Prepare the lease schedule for the lessee c) Prepare the necessary journal entries for January 1 2013 and Dec 31 2013

On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to lease a specialized, state-of-the-art photocopier. The following information relates to the lease contract. 1. The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000. 2. The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 years 3. At the end of the lease term, the photocopier must be returned to the Boss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation (when applicable) 4. The lease agreement requires annual rental payments beginning January 1 2013 5. Boss Limited desires a 5% rate of return which is known to MR. MR Stationery's incremental borrowing rate is 7%. Requirements: (Assume the financial year ends on December 31) a) Discuss the nature of the lease for the lessee using the 5 tests criteria b) Prepare the lease schedule for the lessee c) Prepare the necessary journal entries for January 1 2013 and Dec 31 2013

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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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

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On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to
lease a specialized, state-of-the-art photocopier. The following information relates to the
lease contract. 1. The cost of the photocopier is $525,000 and the fair value of the
equipment on January 1 2013 is $700,000. 2. The term of the lease is 7 years with no
option to renew and the photocopier has an estimated useful life of 9 years 3. At the end
of the lease term, the photocopier must be returned to the Boss Limited. It has a
guaranteed residual value of $50,000. MR Stationery uses the straight line method of
depreciation (when applicable) 4. The lease agreement requires annual rental payments
beginning January 1 2013 5. Boss Limited desires a 5% rate of return which is known to
MR. MR Stationery's incremental borrowing rate is 7%. Requirements: (Assume the
financial year ends on December 31) a) Discuss the nature of the lease for the lessee using
the 5 tests criteria b) Prepare the lease schedule for the lessee c) Prepare the necessary
journal entries for January 1 2013 and Dec 31 2013

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