On January 1, 2014, Ursula Limited agreed to a non-cancellable lease for a submarine, which the following information is available: a. The asset is new at the inception of the lease term with a 16 year expected life and is worth $219,000. b. Initial lease term is five years at $40,000 per year (includes $8,000 for insurance and maintenance), starting and paid on 1 January 2014. At the end of
On January 1, 2014, Ursula Limited agreed to a non-cancellable lease for a submarine, which the following information is available: a. The asset is new at the inception of the lease term with a 16 year expected life and is worth $219,000. b. Initial lease term is five years at $40,000 per year (includes $8,000 for insurance and maintenance), starting and paid on 1 January 2014. At the end of
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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On January 1, 2014, Ursula Limited agreed to a non-cancellable lease for a submarine, which the following information is available:
a. The asset is new at the inception of the lease term with a 16 year expected life and is worth $219,000.
b. Initial lease term is five years at $40,000 per year (includes $8,000 for insurance and maintenance), starting and paid on 1 January 2014.
At the end of the initial lease term, the lease is renewable at Ursula's option for $20,000 per year (includes $5,000 for insurance and maintenance) for a further 8 years.
d. Any residual value is not guaranteed by Ursula Limited and the asset reverts back to the lessor at the end of any lease term.
The straight-line depreciation method is used for the leased asset
f. Ursula Limited's incremental borrowing rate is 8%. The rate implicit
in the lease is unknown.
g. Ursula can rent a submarine that is 8 years old today for approximately $ 35,000 per year.
h. Ursula Limited has a 31 December fiscal year-end.
Required:
1. Is this an operating lease or a financing lease? Explain.
2. Prepare an amortization schedule for the first two years.
3. Prepare all necessary entries for 2014.
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