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QUESTION 4 A Ltd (Lessor) and Railway Ltd (Lessee) agree on the following terms for the leasing of a tunnel boring machine. Commencement date
QUESTION 4 A Ltd (Lessor) and Railway Ltd (Lessee) agree on the following terms for the leasing of a tunnel boring machine. Commencement date Lease term Lease classification Economic life of the machine 1 April 2019 7 years Finance lease 10 years Upfront payment due on the commencement date $5 690 400 Fixed payments per annum received at year end UGRV $1 500 000 $2 500 000 The interest rate implicit in the lease IDC incurred by the lessor IDC incurred by the lessee 8% $ 0 $10 000 The relevant present value discount factors are: Question 4 continued: Present value of $1 in n periods n = 7 Present value of an annuity i=8% Lessor's interest income SCF classification Lessee's interest expense SCF classification PART A for A Ltd (Lessor) Required: 0.5835 5.2064 CFOA CFFA (i) Prepare the journal entry for A Ltd at commencement date. (ii) What is the fair value of the underlying asset? (iii) Complete the lessor's table in the space provided. Note: You must round to the nearest whole dollar in your calculations for interest and finance lease receivable reduction each year. Follow the examples completed in the lectures and tutorials. (iv) Determine the total interest income that A Ltd will recognise over the lease term. (v) Prepare the additional journal entry required at the end of the lease. (vi) Prepare financial statements for A Ltd to reflect the effects of the lease for the financial periods ending 31 March 2020, 2022, 2025, and 2026.
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