On 1st July 20X4, Torrens Ltd leased a specialised machine to Loftus Ltd, incurring $1,200 in costs to prepare and execute the lease document. Loftus Ltd incurred $650 in costs to negotiate the agreement. The fair value of the leased machine is $58,874. The penalty for cancellation of the lease is $20 000. Purchase option is available at the end of lease term at the price $7,000. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $950. The implicit interest rate is applied for the lessee to calculate the lease liability. The lease agreement details are as follows. Length of lease 4 years Commencement date 1st July 20X4 Annual payments at the end of each year of the lease term $20,000 Residual value at the end of lease term, 50% guaranteed by Loftus Ltd $8,000 The implicit interest rate in the lease Unknown Maintenance is done once a year at the end of May by Leo Ltd. Torrens Ltd paid the maintenance fees $4,000 and is reimbursed by Loftus Ltd. Maintenance fees are included in the annual lease payment of $20,000. The machine is depreciated on a straight-line basis. It is expected that Loftus Ltd will return the machine to Torrens Ltd at the end of the lease term. The leased machine is sold at a price of $9,000 once it is returned at the end of 20X8. Required: Please label your responses as 1), 2). 1) Calculate the implicit interest rate. (2/11) 2) Assuming the implicit interest rate is 8%, prepare the journal entries for the Loftus Ltd on 1st July 20X4, 30th June 20X5, and 30th June 20X8.(9/11) On 1st July 20X4, Torrens Ltd leased a specialised machine to Loftus Ltd, incurring $1,200 in costs to prepare and execute the lease document. Loftus Ltd incurred $650 in costs to negotiate the agreement. The fair value of the leased machine is $58,874. The penalty for cancellation of the lease is $20 000. Purchase option is available at the end of lease term at the price $7,000. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $950. The implicit interest rate is applied for the lessee to calculate the lease liability. The lease agreement details are as follows. Length of lease 4 years Commencement date 1st July 20X4 Annual payments at the end of each year of the lease term $20,000 Residual value at the end of lease term, 50% guaranteed by Loftus Ltd $8,000 The implicit interest rate in the lease Unknown Maintenance is done once a year at the end of May by Leo Ltd. Torrens Ltd paid the maintenance fees $4,000 and is reimbursed by Loftus Ltd. Maintenance fees are included in the annual lease payment of $20,000. The machine is depreciated on a straight-line basis. It is expected that Loftus Ltd will return the machine to Torrens Ltd at the end of the lease term. The leased machine is sold at a price of $9,000 once it is returned at the end of 20X8. Required: Please label your responses as 1), 2). 1) Calculate the implicit interest rate. (2/11) 2) Assuming the implicit interest rate is 8%, prepare the journal entries for the Loftus Ltd on 1st July 20X4, 30th June 20X5, and 30th June 20X8.(9/11)
