Question
Burt Ltd enters into a non-cancellable 6-years lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that,
Burt Ltd enters into a non-cancellable 6-years lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $994,576.
The machinery is expected to have an economic life of 7 years, after which time it will have an expected residual value of $290,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 6thyear for $230,000.
There are to be 6 annual payments of $300,000, the first being made on 30 June 2024. Included within the $300,000 lease payments is an amount of $40,000 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:
a) Determine the rate of interest implicit in the lease and calculate the present value of the lease payments.
| In this question the implicit rate is (percent): |
Proof (Enter the proof in the table below)
| Description | Calculation | Total |
|---|---|---|
| Periodic lease payments | ||
| Bargain purchase option | ||
| Fair value at lease inception | ||
b) Prepare the journal entries in the books of Burt Ltd at the start of the agreement and for the years ending 30 June 2024 and 30 June 2025.
1st July 2023
| Debit/Credit | Description | Debit Amount | Credit Amount |
|---|---|---|---|
30th June 2024
| Debit/Credit | Description | Debit Amount | Credit Amount |
|---|---|---|---|
30th June 2025
| Debit/Credit | Description | Debit Amount | Credit Amount |
|---|---|---|---|
c) Prepare the portion of the statement of financial position for the year ending 30 June 2024 and 2025 relating to the lease asset and lease liability.
Assets
| Description | 30th June 2024 | 30th June 2025 |
|---|---|---|
| Non-current Assets | ||
Liabilities
| Description | 30th June 2024 | 30th June 2025 |
|---|---|---|
| Current Liabilities | ||
| Lease Liability | ||
| Non-current Liabilities | ||
| Lease Liability | ||
Step by Step Solution
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Formula Working A B D E G 1 I Implicit rate is the rate at which fair value of the asset will be equ...
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
