Question
On 30 June 2022, Road Ltd leased a machine to Path Ltd. The machine was in the records of Road Ltd on 30 June 2022
On 30 June 2022, Road Ltd leased a machine to Path Ltd. The machine was in the records of Road Ltd on 30 June 2022 at its fair value of $162,000. The lease agreement contained the following provisions:
Lease term | 3 years |
Economic life of machine | 4 years |
Annual rental payment, in advance (first payment on 30/6/22) | $55,000 |
Residual value at end of the lease term | $15,000 |
Residual value guaranteed by lessee | $12,000 |
Interest rate implicit in lease | 9% |
Present value of $1 in 3 years at 9% | 0.7722 |
Present value of an annuity of $1 for 2 payments at 9% | 1.7591 |
Present value of an annuity of $1 for 3 payments at 9% | 2.5313 |
The machine will be depreciated by Path Ltd on a straight-line basis. Path Ltd intends to return the machine to Road Ltd at the end of the lease term. The lease has been classified as a finance lease by Road Ltd.
Initial direct costs for setting up the lease were incurred by both parties: $1,983 for Path Ltd and $1,334 for Road Ltd.
Required:
a) Prepare the lease payments schedule for Path Ltd. Show all calculations. (6 marks)
b) Prepare the journal entries in the records of Path Ltd on 30 June 2022 and 30 June 2023. Show all calculations. (5 marks)
c) Prepare the journal entries in the records of Road Ltd on 30 June 2022 and 30 June 2023. Show all calculations. (4 marks)
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