Lease classification, lease accounting LO3, 7 Acumen Ltd enters into a 5year agreement to lease

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Lease classification, lease accounting   LO3, 7 Acumen Ltd enters into a 5‐year agreement to lease an item of machinery from Ascor Ltd on 1 July 2019. Acumen Ltd incurred costs of $3928 in setting up the lease agreement. The machinery has a fair value of $492 000 at the inception of the lease and it is expected to have an economic life of 6 years, after which time it will have a residual value of $45 000. The lease agreement details are as follows. Length of lease 5 years Commencement date 1 July 2019 Annual lease payment, payable 30 June each year commencing 30 June 2020 $110 000 Residual value at the end of the lease term $100 000 Residual value guarantee by Acumen Ltd $60 000 Interest rate implicit in the lease 6% The lease is cancellable without any penalties. All insurance and maintenance costs are paid by Ascor Ltd and are expected to amount to $10 000 per year and will be reimbursed by Acumen Ltd by being included in the annual lease payment of $110 000. The machinery will be depreciated on a straight‐line basis. It is expected that Acumen Ltd will return the machinery to Ascor Ltd at the end of the lease. Required 1. Calculate the initial direct costs incurred by Acumen Ltd to negotiate the lease agreement. 2. Prepare the journal entries to account for the lease in the books of Acumen Ltd for the year ended 30 June 2020. 3. Prepare a schedule of lease receipts for Ascor Ltd. 4. Prepare the journal entries to account for the lease in the books of Ascor Ltd for the year ended 30 June 2020.

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Financial Reporting

ISBN: 978-0730363361

2nd Edition

Authors: Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes

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