Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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)

Opening

Closing

Year

Cash Payment

Exe Costs

Lease Payment

Lease Liab

Interest Part

Principal Part

Lease Liab

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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

SAP S/4 HANA For Financial Accounting Associates SAP Certified Application Associate

Authors: D Jacobs ,S Matiana

1st Edition

1545316171, 978-1545316177

More Books

Students also viewed these Accounting questions

Question

LOQ 5-6: How did Vygotsky view childrens cognitive development?

Answered: 1 week ago