Question $2$

On $1$ January $2021,$ A Ltd leased equipment to B Ltd$.$ for a four$-$year period ending $31$

December $2024,$ at which time possession of the leased asset will revert back to A Ltd$.$ The

cash price of the equipment is $$365,760$ and has an expected useful life of six years. The

expected residual value of $$25,000$ at $31$ December $2024,$ is not guaranteed. Equal

payments under the lease are $$100,000.$ The first payment was made on $1$ January $2021,$ and

subsequent payments due on $31$ December of each year. Both companies have the

accounting period ended at $31$ December of each year. B Ltd$\text{'}$s incremental borrowing rate is

$12\%.$ B Ltd$.$ knows the interest rate implicit in the lease payments is $10\%.$ Both

companies use straight$-$line depreciation method.

Required:

$($a$)$ How should this lease be classified by B Ltd$.($the lessee$)?$ Why?

$($b$)$ Prepare the appropriate entries for B Ltd$.$ for the year of $2021.$

$($c$)$ Prepare the appropriate entries for B Ltd$.$ on $31$ December $2024,$ assuming the

equipment is returned to A Ltd$.$ and the actual residual value on the date is $$1,500.$