Question
Question 3 Accounting for Lease On 1 April 2019, Ares Ltd leased equipment to Hermes Ltd. The lease agreement is non-cancellable with a lease term
Question 3 Accounting for Lease
On 1 April 2019, Ares Ltd leased equipment to Hermes Ltd. The lease agreement is non-cancellable with a lease term of three years. The equipment is expected to have an economic life of five years, after which time it will have an expected salvage value of $30,000. There are to be three annual payments of $125,000, the first to be made on 31 March 2020 (i.e. at the end of the year). Included in the $125,000 is $5,000 representing payment for insurance and maintenance. The interest rate implicit in the lease is 6%. The fair value of the equipment at the inception of the lease is $320,761. Hermes Ltd will return the equipment to Ares Ltd at the end of the lease term. Assume straight-line depreciation is used for depreciation of the leased equipment.
Required a) Prepare lease payment schedule for Hermes Ltd (show all workings)
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Year | Cash Payment | Exe Costs | Lease Payment | Lease Liab | Interest Part | Principal Part | Lease Liab |
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b) Record the relevant journal entries for Hermes Ltd relating for 1 April 2019 and for the year ending 31 March 2020, Type in any required workings or justifications to the journal entries.
c) Show extracts of the financial position for the leased asset and liability for Hermes Ltd for the year ending 31 March 2020.
d) If Hermes Ltd decides to take over the ownership of the leased equipment at the end of the lease term, explain the effect of this arrangement on the net profit of Hermes Ltd, in comparison to the arrangement in which the leased asset is returned to Ares Ltd.
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