Question
On 30 June 2022, Sock Ltd leased equipment to Shoe Ltd. The equipment was in the records of Sock Ltd on 30 June 2022 at
On 30 June 2022, Sock Ltd leased equipment to Shoe Ltd. The equipment was in the records of Sock Ltd on 30 June 2022 at its fair value of $123,000. The lease agreement contained the following provisions:
Lease term | 3 years |
Economic life of equipment | 4 years |
Annual rental payment, in arrears (first payment on 29/6/23) | $45,000 |
Residual value at end of the lease term | $10,000 |
Residual value guaranteed by lessee | $4,000 |
Interest rate implicit in lease | 8% |
Present value of $1 in 3 years at 8 % | 0.7938 |
Present value of an annuity of $1 for 2 payments at 8% | 1.7833 |
Present value of an annuity of $1 for 3 payments at 8% | 2.5771 |
The equipment will be depreciated by Shoe Ltd on a straight-line basis. Shoe Ltd intends to return the equipment to Sock Ltd at the end of the lease term. The lease has been classified as a finance lease by Sock Ltd.
Initial direct costs for setting up the lease were incurred by both parties: $855 for Shoe Ltd and $908 for Sock Ltd.
Required:
a) Prepare the lease payments schedule for Shoe Ltd. Show all calculations.
b) Prepare the journal entries in the records of Shoe Ltd on 30 June 2022 and 29 June 2023. Show all calculations.
c) Prepare the journal entries in the records of Sock Ltd on 30 June 2022 and 29 June 2023. Show all calculations.
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