Question
Part 1: Strong Ltd entered into a lease for some machinery with Big Ltd on 1 July 2020. The details of the lease agreement were
Part 1:
Strong Ltd entered into a lease for some machinery with Big Ltd on 1 July 2020. The details of the lease agreement were as follows:
1. The term of the lease is 3 years and commences on 1 July 2020.
2. An initial lease payment of $100,000 is to be made on 1 July 2020
3. Two further lease payments of $100,000 annually on 30 June, commencing 30 June 2021.
4. The residual value at the end of the lease is $50,000 and has been guaranteed by the lessee. There is a purchase option that allows the lessee to purchase the machinery at the end of the lease for the guaranteed residual value. However it is expected that Strong Ltd (the lessee) will return the machinery to the lessor (Big Ltd) at the end of the lease (30 June 2023). The lessee expects to pay $3,000 in relation to the guaranteed residual value as the machinery is expected to realise $47,000 at the end of the lease term.
5. The economic life of the asset is 4 years.
6. The residual value at the end of the economic life is $5,000.
7. The interest rate implicit in the lease is 10%
8. The fair value of the machinery as at 1 July 2020 is $308,600.
9. Strong Ltd incurred direct costs of $4,000 in relation to the lease. Costs of $2,500 were incurred by Big Ltd.
Required:
(a) (i) Identify the components of the lease payments under this lease
(ii) Calculate the present value of the lease payments.
(iii) Calculate the amount of the lease asset and lease liability to be recognised at the beginning of the lease by the lessee.
(You need to show all calculations and show the basis for these).
(b) Draw up a schedule for the lease liability for the duration of the lease.
(c) Prepare the journal entries required to account for the lease in the accounts of Strong Ltd:
1. For the year ending 30 June 2021
2. (You need to include dates for all journal entries)
(d) Show what amount in relation to this lease would be included in the statement of financial position as at 30 June 2022 as a non-current liability:
Part 2:
Strong Ltd entered into a lease for a building with Enterprise Ltd on 1 January 2020. The details of the lease agreement were as follows:
1. The lease is non-cancellable and is for 1 year.
2. As an incentive to enter into the lease, the lessor agreed that the last month would be rent free.
3. An initial lease payment of $135,000 is to be made on 1 January 2020, with another payment of $112,500 is to be made on 1 July 2020.
4.The building has an economic life of 15 years and the fair value of the building at 1 January 2020 is $1,420,000.
Required:
Assuming that the lessee has elected to apply the recognition exemption in AASB 16, prepare the journal entries required to account for the lease in the books of the lessee, Strong Ltd for the years ending 30 June 2020 and 30 June 2021. Show all calculations and dates for all journal entries.
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