Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 4 Equipment Ltd leased new advanced computer equipment to STU Ltd on 1 January 2019. STU Ltd has to pay annual rental of $290,000

Question 4 Equipment Ltd leased new advanced computer equipment to STU Ltd on 1 January 2019. STU Ltd has to pay annual rental of $290,000 starting at 1 January 2019. It is a four years lease with ultimate rental payment failing on 1 January 2022. At the end of lease term, STU Ltd has the option of purchasing the computer equipment for $20,000, and it is highly probable that STU Ltd will exercise such option. On the other hand, , STU Ltd will guarantee to Equipment Ltd a residue value of $160,000, Also, STU Ltd has to pay insurance cost, repair and maintenance expenditure on the computer equipment. Before the execution of lease, STU Ltd paid $16,500 as legal service fee and $32,500 to intermediates as negotiation of lease term and condition.

The equipment has an expected useful life of 5 years, while STU Ltd purchase the computer equipment from the market, the cash price is $1,160,000

The market borrowing rate at commencement of lease is 11%

Required

a. In Equipment Ltds point of view, explain and determine whether the above arrangement is finance or operating lease. (4 marks)

b. Assume the lease is a finance lease, prepare journal entries of STU Ltd for the financial year ended 31 December 2019 (13 marks)

c. Prepare the extract of Statement of profit or loss and other comprehensive income and Statement of Financial Position to report the lease for Equipment Ltd for the financial year ended 31 December 2019 (3 marks)

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

EDI Security Control And Audit

Authors: Albert J. Marcella Jr, Sally Chan, John Merriam

1st Edition

0890066108, 978-0890066102

More Books

Students also viewed these Accounting questions

Question

c. What groups were least represented? Why do you think this is so?

Answered: 1 week ago