3
FuLLox (Hong Kong) Limited (FuLLox) is a trusted ICT partner in providing Document Services and Communication. FuLLox specializes in document management consultancy to every industry. One of its core businesses is to manufacture and lease most advanced copier machines in the business sector. On 7 November 2020, HKCC invited FuLLox to offer a lease of copier machine. After reviewing the HKCC financial status, the length of the lease period and the residual value, FuLLox has determined an implicit rate of 6 percent which is unknown to HKCC. The annual rental payment is $22,900, payable at the beginning of each year. Incremental borrowing rate of HKCC is 8 percent. On 1 January 2021, HKCC signed a 6-year, non-cancelable lease agreement for a copier machine Model TT. First lease payment is payable on 1 January 2021. The Model TT has a fair value of $125,000 at the commencement of the lease with an estimated economic life of 9 years. The residual value at the end of the lease term is estimated to be $7,996, but it is not guaranteed. In any cases, HKCC predicts that the expected residual value at the end of the lease will be greater than the unguaranteed amount. By the end of the lease term, HKCC has to revert the copier machine back to FuLLox. The cost of Model TT is $98,000. It is one of the most popular leasing products in FuLLox. Both entities' financial year end are 31 December. HKCC uses the straight-line method of depreciation for all of its office equipment. Required: [All figures MUST be rounded to an integer (e.g. 50% and $1,000) by taking full decimal places in the middle steps and round the final answers into the whole dollar amount] a. Explain how FuLLox should classify the lease of the copier machine Model TT according to five criteria tests supporting with detail workings or computations where appropriate [within 250 words]. b. Prepare the relevant journal entries related to the lease arrangement in the books of FuLLox for the c. Prepare the relevant journal entries related to the lease arrangement in the books of HKCC for the year 2021. d. Prepare an extract of the statement of financial position as at 31 December 2021 by showing all the relevant items related to the lease arrangement for HKCC. year 2021. (Notes: You are required to state all the appropriate dates when preparing journal entries in above parts (b) and (c). Otherwise, marks may be deducted.) (Total 50 marks)
