Question 1 Au Farm Ltd leases a Tractor from Agrimachine Ltd that cost Agrimachine Ltd $ 80 000 to manufacture. The lease agreement started on 1 July 2022 for 8 years. The life of the Tractor is estimated to be 8 years with an unguaranteed residual value of $20 000. Lease payments include $10 000 on 1 July 2022 and $12 000 on 3 June of each year for8 years. The rate of interest implicit in the lease is 6%. Required: a) Prepare the journal entry on 1 July 2022 in the books of Agrimachine Ltd. b) Prepare the journal entry on 30 June 2023 in the books of Au Farm Ltd. c) Explain the exceptional conditions that lease assets and lease liability are not recognised and the lease contract is considered as an operating lease.

Question 1 Au Farm Ltd leases a Tractor from Agrimachine Ltd that cost Agrimachine Ltd $ 80 000 to manufacture. The lease agreement started on 1 July 2022 for 8 years. The life of the Tractor is estimated to be 8 years with an unguaranteed residual value of $20 000. Lease payments include $10 000 on 1 July 2022 and $12 000 on 3 June of each year for8 years. The rate of interest implicit in the lease is 6%. Required: a) Prepare the journal entry on 1 July 2022 in the books of Agrimachine Ltd. b) Prepare the journal entry on 30 June 2023 in the books of Au Farm Ltd. c) Explain the exceptional conditions that lease assets and lease liability are not recognised and the lease contract is considered as an operating lease.

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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Question 2 On 1 July 2022, Shaggy Ltd leased a processing plant to Scooby Ltd. The plant was purchased by Shaggy Ltd on 1 July 2022 for its fair value of $353 000. The lease agreement contained the following provisions: Lease term 3 years Economic life of plant 5 years Annual rental payment, in arrears (commencing 30/6/23) $120 000 Residual value at end of the lease term $50 000 Residual guaranteed by lessee $30 000 Interest rate implicit in lease 7% The processing plant will be depreciated by Scooby Ltd on a straight-line basis. Scooby Ltd intends to return the processing plant to Shaggy Ltd at the end of the lease term. The lease has been classified as a finance lease by Shaggy Ltd. Initial direct costs for setting up the lease were incurred by both parties: $1 595 for Scooby Ltd and $2731 for Shaggy Ltd. Required: Prepare the lease payments schedule for Scooby Ltd. Prepare the journal entries in the records of Scooby Ltd on 1 July 2022…
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