QUESTION 1

Peking Ltd leased a machine to Duk Ltd on 1 July 2023. The machine was bought by Peking Ltd on the same day (1 July 2023) and has a fair value of $341 593. The lease term is 3 years. Duk Ltd is required to make an annual payment, payable in arrears on 30 June each year of $125 000. Included in this annual payment are executory costs of $5 000 for insurance and maintenance.

The estimated economic life of the machine is 5 years after which the residual value is expected to be zero. The estimated residual value of the machine at the end of lease term is $49 000. There is no residual value guaranteed by Duk Ltd. The interest rate implicit in the lease is 9%.

The lease is cancellable only with the permission of Peking Ltd. Duk Ltd will return the machine to Peking Ltd at the end of the lease term. Peking Ltd is a financier lessor. The lease has been classified as a finance lease by Peking Ltd. There are no initial direct costs incurred by Duk Ltd. Peking pays the insurance and maintenance expense annually in arrears.

The present value interest factor of an annuity of $1 over 3 years at 9% = 2.5313. The present value interest factor of a lumpsum over 3 years at 9% = 0.7722. You may ignore tax.

Required

Provide ALL the journal entries in the records of Duk Ltd for the whole year ended 30 June 2024 (no narrations are required). (10 marks)

Provide ALL the journal entries in the records of Peking Ltd for the whole year ended 30 June 2024 (no narrations are required). (12 marks)

Provide ALL the journal entries in the records of Peking Ltd for the whole year ended 30 June 2024 if the lease was classified as an operating lease (no narrations are required). (9 marks)

Compare the journal entries for Peking Ltd in part (b) and (c) for the year ended 30 June 2024. Please explain whether the following financial statement items would be higher, lower or the same under an operating lease classification by Peking Ltd (compared to the finance lease classification):

Assets (2)

Income (2)