Lease classification and accounting

Birkenhead Ltd has entered into an agreement to lease a D9 Bulldozer to Albert Ltd. The lease agreement details are as follows:

Length of lease 5 years

Commencement date 1 July 2013

Annual lease payment, payable 30 June $8,000

each year commencing 30 June 2014

Fair value of the bulldozer at 1 July,2013 $34,797

Estimated economic life of the bulldozer 8 years

Estimated residual value of the plant at the $2,000

end of its economic life

Residual value at the end of the lease term,

of which 50% is guaranteed by Ballarat Ltd $7,200

Interest rate implicit in the lease 9%

The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Albert Ltd does not intend to buy the bulldozer at the end of the lease term. Birkenhead Ltd incurred $1,000 to negotiate and execute the lease agreement. Birkenhead Ltd purchased the bulldozer for $34,797 just before the inception of the lease.

Required

• State how both companies should classify the lease. Give reasons for your answer.
• Prepare a schedule of lease payments for Albert Ltd.
• Prepare a schedule of lease receipts for BirkenheadLtd.
• Prepare journal entries to record the lease transaction for the year ended 30 June 2014in the record of both companies.
• Prepare an appropriate note to the financial statements of both companies as at 30 June 2014.