10.12 Lease classification, lease accounting LO3, 4, 5 On 30 June 2019, Adeline Ltd purchased machinery for its fair value of $42500 and then leased it to Christina Ltd. Christina Ltd incurred $349 in costs to negotiate the lease agreement. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $2500. The lease agreement details are as follows. Length of lease Commencement date Annual lease payment, payable 30 June each year commencing 30 June 2019 Residual value at the end of the lease term Residual value guarantee by Christina Ltd Interest rate implicit in the lease The lease is cancellable, but only with the permission of Adeline Ltd 4 years 30 June 2019 $12 000 $10 000 $8000 8% All insurance and maintenance costs are paid by Adeline Ltd and amount to $2000 per year and will be reimbursed by Christina Ltd by being included in the annual lease payment of $12000 The machinery will be depreciated on a straight-line basis. It is expected that Christina Ltd will return the machinery at the end of the lease to Adeline Ltd. Required 1. Calculate the initial direct costs incurred by Adeline Ltd to negotiate the lease agreement. 2. Describe why the lease can be considered as a finance lease by Adeline Ltd, giving at least three reasons for your answer ended 30 June 2019 and 30 June 2020 ended 30 June 2020 3. Prepare the journal entries to account for the lease in the books of Christina Ltd for the years 4. Prepare the journal entries to account for the lease in the books of Adeline Ltd for the year 10.12 Lease classification, lease accounting LO3, 4, 5 On 30 June 2019, Adeline Ltd purchased machinery for its fair value of $42500 and then leased it to Christina Ltd. Christina Ltd incurred $349 in costs to negotiate the lease agreement. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $2500. The lease agreement details are as follows. Length of lease Commencement date Annual lease payment, payable 30 June each year commencing 30 June 2019 Residual value at the end of the lease term Residual value guarantee by Christina Ltd Interest rate implicit in the lease The lease is cancellable, but only with the permission of Adeline Ltd 4 years 30 June 2019 $12 000 $10 000 $8000 8% All insurance and maintenance costs are paid by Adeline Ltd and amount to $2000 per year and will be reimbursed by Christina Ltd by being included in the annual lease payment of $12000 The machinery will be depreciated on a straight-line basis. It is expected that Christina Ltd will return the machinery at the end of the lease to Adeline Ltd. Required 1. Calculate the initial direct costs incurred by Adeline Ltd to negotiate the lease agreement. 2. Describe why the lease can be considered as a finance lease by Adeline Ltd, giving at least three reasons for your answer ended 30 June 2019 and 30 June 2020 ended 30 June 2020 3. Prepare the journal entries to account for the lease in the books of Christina Ltd for the years 4. Prepare the journal entries to account for the lease in the books of Adeline Ltd for the year
