QUESTION 3: LEASES (18 Marks)

PART 1 Eternals Ltd entered into a lease contract for specialised vehicles with MCU Ltd on 1 July 2021. The details of the lease agreement were as follows: The lease is for 4 years and cannot be cancelled. However, the lease can be renewed for a further 2 years for the same payment amounts. Eternals Ltd is not expected to renew the lease at the end of 4 years. There are 4 annual payments of $66,000 to be paid on 1 July each year. The first payment is to be made on 1 July 2021. The interest rate implicit in the lease is 6%. The residual value at the end of the lease term is $50,000. The lessee, Eternals Ltd, has guaranteed all of this residual value. MCU Ltd incurred direct costs of $1,800 in relation to the lease. No costs were incurred by Eternals Ltd. At the end of the lease, there is also an option for Eternals Ltd to purchase the vehicle for the guaranteed residual value. However, Eternals Ltd is not expected to purchase the vehicle at the end of the lease term (30 June 2025). The fair value of the vehicle at 1 July 2021 is $220,000. The vehicle has an estimated economic life of 6 years with a residual value of $2,000. Eternals Ltd applies straight-line depreciation to this type of vehicle. It is expected that Eternals Ltd will not be required to pay any of the guaranteed residual value at the end of the lease, as the vehicle is expected to realise at least $52,000 at the end of the lease.

REQUIRED (a) Calculate the amount of the lease asset and lease liability to be recognised at the beginning of the lease by the lessee, Eternals Ltd. Show all calculations and explain/identify the basis for these. Round to the closet amount.

[4 marks]

(b) Draw up a schedule for the lease liability for the duration of the lease.

[4 marks]

ACCT 2005d/s Financial Accounting 2 2021 SP2

Financial Accounting 2 SP2 2021 ACCT 2005 Final Exam, page 7 of 18

(c) Prepare the general journal entries required to be prepared by Eternals Ltd to account for the lease for the year ending 30 June 2022 (i.e., from 1 July 2021 till 30 June 2022). Show all calculations and the dates for all journal entries. Round to the closet amount. Narrations are NOT required

[4.5 marks]

PART 2 Eternals Ltd entered into a lease for a thermal imaging camera from Thena Ltd on 1 January 2021. The details of the lease contract were as follows: The lease is non-cancellable and is for 2 years. 6 fixed payments are to be made in advance every 4 months. An initial lease payment of $500 is to be made on 1 January 2021, with the next payment due on 1 May 2021. As an incentive to enter into the lease, Thena Ltd paid for an employee of Eternals Ltd to attend a specialised 1-day training course on how to use thermal imaging cameras. This training was undertaken on 1 January 2021. Eternals Ltd would have otherwise had to pay $240 for this training. Eternals Ltd expenses such training costs. These cameras have an economic life of 4 years with no residual value and the fair value of this camera at 1 July 2021 is $2,700.

REQUIRED Assuming that the lessee has elected to apply the recognition exemption in AASB 16, prepare the journal entries required to account for this lease in the books of the lessee, Eternals Ltd, for the year ending 30 June 2021 (i.e., from 1 January 2021 to 30 June 2021). Show all calculations and dates for all journal entries.

[5.5 marks]

TOTAL MARKS FOR QUESTION 2 = 4 + 4 + 4.5 + 5.5 = 18 MARKS