I want to know the answer of Q 3, Q4, Q7, Q8
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Intermediate Financial Accounting 2 Topic 4 - Question Question 1 (Basic) On the 1 January 2009 at the start of the accounting year Lessor Ltd leases out machinery on a direct finance lease to Lessee Ltd. The lessee will pay at the end of each year for three years a rental of $1,500,000 and has guaranteed a residual value to Lessor Ltd of $2,500,000. Lessor Ltd has estimated the unguaranteed residual value will be $521,000. The implicit interest rate in the lease is 10%. Depreciation is straight line over 3 years. Required: For Lessor Ltd show a table of the following accounts for the three years ended 31 December 2009 to 2011 (1) Income statement and (2) Amount receivable under the lease from Lessee Ltd Assume the residual value as estimated is received For Lessee Ltd show a table of the following accounts for the three years ended 31 December 2009 to 2011 (1) Machinery account (2) Income statement (3) Obligation under lease to Lessor Ltd Assume that the guaranteed residual value has to be paid. 1 Intermediate Financial Accounting 2 Topic 4 - Question Question 2 (Basic) (a) What is the primary distinction made between an operating and finance lease? There are proposals to capitalise operating leases as well as finance leases. What is the argument given for this? What is the difference in accounting treatment in a sale and leaseback arrangement between leaseback one which is financing and one which is operating? How would the accounting treatment change if all leases are capitalised? (b) A manufacturing machine with a cash price of $825,000 is acquired by way of a direct finance lease. The terms of the lease agreement are as follows: Effective date 1 January 2009 Lease term: 3 years Instalments $181,250 are payable half yearly in arrears Implicit interest rate is 11.7734 per cent per six months Non-refundable deposit of $75,000 payable immediately The lessor is Lore Ltd and the lessee is Lee Ltd. Lee Ltd estimates the machine has a life of 3 years with no residual value and will depreciate it straight line over those three years. Required: You are required to show the items relating to the lease as they would appear in the statement of financial position and income statement for the years ended 31 December 2009 and 2010 of: (1) (2) Lore Ltd and Lee Ltd Notes to the accounts are not required 2 Intermediate Financial Accounting 2 Topic 4 - Question Question 3 (Basic) Bless Ltd bought equipment at a cost of $300,000 and leased it out on 1 January 2009 for 5 years. The annual rental of $100,000 was payable in advance on 1 January of each year. The fair value of equipment is $385,498 (cash selling price) and the implicit interest rate is 15% per annum. Show how lease items would appear in the books of Bless Ltd (a) If the lease were a finance lease 1. Company's income statement for year ended 31 December 2009 and statement of financial position as at 31 December 2009 2. Note to statement of financial position giving reconciliation of gross investment to net investment (b) If the lease were an operating lease Company's income statement and statement of financial position for year ended 31 December 2009. Any depreciation would be on a straight line basis over 5 years. Question 4 (Moderate) SL Ltd had an asset with carrying value of $3,750,000 and agreed it to sell to B Ltd for $6,228,750 who would lease it back to SL Ltd for 4 years at an annual rental in advance of $1,500,000. Date of sale and the inception of leaseback was 1 January 2009. The residual value is expected to be NIL and the implicit interest rate in the lease is 14% (round up to the nearest unit). Required: Show journal entries for sale and leaseback in books of SL Ltd for the year ended 31 December 2009, assuming the leaseback is an operating lease. 3 Intermediate Financial Accounting 2 Topic 4 - Question Question 5 (Moderate) GRQ Ltd had an asset with carrying value of $5,000,000 and agreed it to sell to BB Ltd for $8,717,130 who would lease it back to GRQ Ltd for 4 years at an annual rental in advance of $2,500,000. The date of sale and the inception of leaseback was 1 January 2009. The residual value is expected to be nil and the implicit interest rate in the lease is 10% (round up to the nearest unit). Required: (a) Assume the lease back is a finance lease, show the journal entries in the books of GRQ Ltd for the year ended 31 December 2009. It may be assumed that the equipment has a life of 4 year with no residual value and that the amount of depreciation per year is equal over the 4 years. (b) Assume the lease back is an operating lease, show the relevant items in the income statement of GRQ Ltd for the year ended 31 December 2009. 4 Intermediate Financial Accounting 2 Topic 4 - Question Question 6 (Moderate) Lessee Ltd, on 1 July 2010, sells a tractor having a carrying amount on its books of $100,000 to Lessor Ltd for $140,000 and immediately leases the tractor back under the following conditions: The term of the lease is 10 years, non-cancellable, and requires rental payments of $22,784 at the end of each 30 June. The estimated economic life of the tractor is 10 years. There is no residual value. Lessee Ltd pays all executory costs (that is, these are not included in the lease payments). The implicit rate of interest in the lease is 10 percent. Required: (a) Classify the lease for both the lessee and the lessor. (b) Prepare the journal entries for the lessee for the first year of the lease. (c) Prepare the journal entries for the lessee for the second year of the lease. (d) Prepare the journal entries for the lessor for the year ended 30 June 2011 and 2012 of the lease. 5 Intermediate Financial Accounting 2 Topic 4 - Question Question 7 (Moderate) Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2010. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $231,140. The machinery is expected to have an economic life of seven years, after which time it will have no salvage value. There is a bargain purchase option, which Gregory Ltd will be able to exercise at the end of the fifth year, for $50,000. Sanders Ltd manufactures the machinery. The cost of the machinery to Sanders Ltd is $200,000. There are to be five annual payments of $62,500, the first being made on 30 June 2011. Included within the $62,500 lease payments is an amount of $6,250, representing payment to the lessor for the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 percent. Required: (a) (b) Calculate the present value of the minimum lease payments. Prepare the journal entries for the years ending 30 June 2011 and 30 June 2012 in the books of: (i) Sanders Ltd (ii) Gregory Ltd 6 Intermediate Financial Accounting 2 Topic 4 - Question Question 8 (Difficult) Montreal Ltd is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered into an agreement on 1 July 2009 to sell its processing plant to Regina Ltd for $476,517. At the date of sale, the plant had a carrying amount of $400,000 and a future useful life of five years. Regina Ltd immediately leased the processing plant back to Montreal Ltd. The terms of the lease agreement were: Lease term 3 years Economic life of plant 5 years Annual rental payments (commencing 30 June 2010) $165,000 Estimated residual value at end of economic life $90,000 Estimated residual value at end of the lease term $90,000 Guaranteed residual value by Montreal Ltd $60,000 Interest rate implicit in the lease 6% The lease is cancellable, but only with the permission of the lessor At the end of the lease term, the plant is to be returned to Regina Ltd. The annual rental payment includes $15,000 to reimburse the lessor for maintenance costs incurred on behalf of the lessee. Required: 1. Classify the lease for both lessor and lessee. Justify your answer. 2. Prepare a lease payments schedule and the journal entries in the books of Montreal Ltd for the year ending 30 June 2010. Show all workings. 3. Prepare a lease receipts schedule and the journal entries in the books of Regina Ltd for the year ending 30 June 2010. Show all workings. 4. Explain how and why your answer in parts 1 and 2 would change if the lease agreement could be cancelled at any time without penalty. 5. Explain how and why your answer to parts 1, 2 and 3 would change if the processing plant had been manufactured by Regina Ltd at a cost of $400,000 and there is no sale of plant from Montreal Ltd to Regina Ltd. 7 Intermediate Financial Accounting 2 Topic 4 - Question Question 9 (Difficult) Seejoy is a famous football club but has significant cash flow problems. The directors and shareholders wish to take steps to improve the club's financial position. The following proposal had been drafted in an attempt to improve the cash flow of the club. However, the directors need advice upon their implications. Sale and leaseback of football stadium (excluding the land element): The football stadium is currently accounted for using the cost model in HKAS 16 Property, Plant and Equipment. The carrying value of the stadium will be $12 million at 31 December 2009. The stadium will have a remaining life of 20 years at 31 December 2009, and the club uses straight-line depreciation. It is proposed to sell the stadium to a third party institution on 1 January 2010 and lease it back under a 20-year finance lease. The sale price and fair value is $15 million, which is the present value of the minimum lease payments. The agreement transfers the title of the stadium back to the football club at the end of the lease at nil cost. The rental is $1.2 million per annum in advance commencing on 1 January 2010. The directors do not wish to treat this transaction as the raising of a secured loan. The implicit interest rate on the finance in the lease is 5.6%. Required: Discuss how the above proposal would be dealt with in the financial statements of Seejoy for the year ended 31 December 2010, setting out their accounting treatment and appropriateness in helping the football club's cash flow problems. 8 Intermediate Financial Accounting 2 Topic 4 - Question Question 10 (Moderate) On 1 January 2011, KW Ltd sells machine A to the bank for $1,200,000 and immediately gets back its possession under an operating lease with the bank. Machine A has a book value of $750,000 in KW's accounts on 1 January 2011 when its fair value is $900,000. Under the lease, monthly rentals in arrears are payable at the end of every month until 31 December 2013. From 1 January to 30 September 2011, the rent is $27,000 per month. Thereafter, the monthly rent is reduced to $18,000 until 30 June 2012, after which it is further reduced to $15,000 which is very close to the expected market rental of similar machines. Required: Prepare (i) the accounting journal entries for the disposal of machine A on 1 January 2011 and (ii) summarized accounting journal entries for rental payment for the years ended 31 December 2011 and 31 December 2012. 9
