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FINANCIAL ACCOUNTING
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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Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Included within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis. REQUIRED: SHOW ALL WORKINGS a) Determine the rate of interest implicit in the lease and calculate the present value of the lease payments. b) Prepare the journal entries in the books of Tea Tree Ltd for the years ending 30 June 2021 and 30 June 2022. Prepare the portion of the statement of financial position for the year ending 30 June 2022 relating to the lease asset and lease liability. c)
Transcribed Image Text:Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Included within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis. REQUIRED: SHOW ALL WORKINGS a) Determine the rate of interest implicit in the lease and calculate the present value of the lease payments. b) Prepare the journal entries in the books of Tea Tree Ltd for the years ending 30 June 2021 and 30 June 2022. Prepare the portion of the statement of financial position for the year ending 30 June 2022 relating to the lease asset and lease liability. c)
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