Question 19 (9 marks)

On 1 July 20x2, Large Mart signs a seven (7) year lease contract for a photocopier for its office. At the end of the lease period Large Mart will have the option to purchase the photocopier for $500 (but the expected fair value of the photocopier at the end of the lease term is $1,000). Large Mart is able to cancel the lease contract after paying 85% of the outstanding lease payments as a fine. Large Mart expects that the useful life of the photocopier is eight (8) years and all items in the Machinery/Equipment Account of Large Mart are depreciated using the sums-of-digits method. The photocopier is expected to have a residual value of $50 at the end of its useful life.

The lease contract requires Large Mart to make the following payments: $10,000 when the contract is signed (1 July 20x2), and $1,000 at the end of each year (30 June) during the lease term. The Large Mart accounting department has determined that the interest rate implicit in the lease is 12%, and that the market price of the photocopier at the time the lease contract is signed is equal to $15,000.

Required:

a) Calculate the present value of the minimum lease payments AND outline the required calculations. (2 marks)

b) Determine if the lease is a finance lease or an operation lease, and provide a DETAILED explanation of your decision. (2 marks)

c) Provide all journal entries that are necessary in the books of Large Mart to account for the signing of the lease contract AND all lease payments that Large Mart makes during the financial year ended 30 June 20x3. (3 marks)

d) State the amount of depreciation that will be recorded in the books of Large Mart for the year ended 30 June 20x3, assuming that Large Mart uses the sums-of-digits depreciation method AND outline the required calculations. (2 marks)

Question 20 (4 marks)

The statement of cash flows is an important part of every financial report.

Required:

a) Explain why the statement of cash flows is useful for the users of financial statements.(2 marks)

b) Determine if the statement of cash flows or the income statement can be manipulated more easily AND explain your decision. (2 marks)

Assets 100-1990 Number Account Name Current Assets 101 Cash at Ba nk 102 Accounts Receivable 103 Lease Receivable 110 Ba nk Trust 120 Inventory Trade/Sales 120.1 Freight in (Trade/Sales) ts Received (Trade/s 120.2 Trade Discount 121 Inventory Components 121.1 Freight in (Components) 121.2 Trade Discount ts Received (Components 130 Office Supplies 131 Prepaid Rent current Non-Current Assets 150 Deferred Ta x Asset 161 Prepaid Rel 163 Motor V ehicles 163.1 Acc. Dep. Motor Vehicles 164 Machinery/Equipment 164.1 Acc. Dep. Machinery/Equipment 65 Buildings 165.1 Acc. Dep. Buildings 166 Warehouse Shelving 166.1 Acc. Dep. Warehouse Shelving 167 Computers 167.1 Acc. Dep. Computers 170 Distribution Rights 170.1 Acc. Amort. Distribution Rights 190 Land Liabilities 200 299 Number Account Name Current Liabilites 202 Accounts Payable 204 W Payable ages 205 Rent Payable 206 Interest Payable 207 Dividends Payable 208 Taxes Payable 215 Share Applications 216 Deben Applications Non-Cu ent Liabilities 230 Provision for Warranty 235 Provision for Remediation 250 Deferred Tax Liability 260 Lease Liability 270 Bank Loan 280 Deben Liability Owners Equity (300-399) Number Account Name 300 Share Capital 320 Retained Earnings 320.1 Dividends 330 General Reserve 350 Income Summary 360 Revaluation Surplus 390 Forfeited Shares Revenue (400-499) Number Account Name 401 Sales Revenue 401.1 Sales Returns/Allowances 420 Lease Revenue 423 Interest Revenue 425 Executory Expense Recoupment 441 Discount Received Payment 450 Reversal of Loss on Revalu ation 455 Reversal of Impairment Loss 460 Gain on Sale 490 Income Tax Revenue Cost of Good Sold (500-599 Number Account Name 500 Cost of Goods Sold Expenses (600-699) Number Account Name 611 Depreciation Expense 612 Amortisation xpense 615 Inventory Write Down Expense 620 Lease xpense 621 Rent Expense 622 Office Supplies Expense 623 Interest Expense 624 W age 625 Executory Expenses 630 Warranty Expense 641 Discount Given Payment 650 Loss on Revaluation 655 Impa ment Loss 660 Loss on Sale 690 Income Tax Expense