Question (10 marks) Sullivan Ltd enters into a non-can 2015. The lease is for a number into a non-cancellable five-year lease agreement with Bubbles Ltd on 1 July e is for a number of spa baths that, at the inception of the lease, have a fair The spas are being used as part of the amenities at Sullivan's exclusive value of $924 560. The spas are being used as part of the executive club, a club whose main clients are politicians. aths are expected to have an economic life of seven years, after which time they will ve no residual value. There is a bargain purchase option that Sullivan Ltd will be able to exercise at the end of the fifth year, for $200 000 Bubbles Ltd manufactures the spa baths. The cost of the spa baths to Bubbles Ltd is $800 000, with the result that Bubbles Ltd is making a profit on sale of $124 560. There are to be five annual payments of $250 000, the first being made on 30 June 2016. Included within the $250 000 lease payments is an amount of $25 000 representing payment to the lessor for the insurance, sanitation and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 per cent. PV of Annuity, 12%, n=5is 3.6048; PV of $1, n=5 is 0.5674. REQUIRED (a) Calculate the present value of the minimum lease payments. (2 marks) (b) Prepare the journal entries for the financial years ending 30 June 2016 and 30 June 201 in the books of Bubbles Ltd, assuming Bubbles Ltd uses the net method. (8 marks) Question (10 marks) Sullivan Ltd enters into a non-can 2015. The lease is for a number into a non-cancellable five-year lease agreement with Bubbles Ltd on 1 July e is for a number of spa baths that, at the inception of the lease, have a fair The spas are being used as part of the amenities at Sullivan's exclusive value of $924 560. The spas are being used as part of the executive club, a club whose main clients are politicians. aths are expected to have an economic life of seven years, after which time they will ve no residual value. There is a bargain purchase option that Sullivan Ltd will be able to exercise at the end of the fifth year, for $200 000 Bubbles Ltd manufactures the spa baths. The cost of the spa baths to Bubbles Ltd is $800 000, with the result that Bubbles Ltd is making a profit on sale of $124 560. There are to be five annual payments of $250 000, the first being made on 30 June 2016. Included within the $250 000 lease payments is an amount of $25 000 representing payment to the lessor for the insurance, sanitation and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 per cent. PV of Annuity, 12%, n=5is 3.6048; PV of $1, n=5 is 0.5674. REQUIRED (a) Calculate the present value of the minimum lease payments. (2 marks) (b) Prepare the journal entries for the financial years ending 30 June 2016 and 30 June 201 in the books of Bubbles Ltd, assuming Bubbles Ltd uses the net method. (8 marks)
