Question 4 Total: 10 Marks On 1 July 2016 Dumbbell Ltd entered into a finance lease with Barbell Ltd to lease a piece of equipment. On that date the equipment was in Barbell Ltd's books at its fair value of $122,000. The following are details of the lease agreement: Start date of lease 1 July 2016 Lease term 4 years Annual payments (made in arrears, 15 payment due 30 June 2017) $35,000 Economic life of equipment 6 years Estimated residual value at the end of the lease term $10,000 Residual value guaranteed by the lessee $8,000 Interest rate implicit in the lease 8% Present value of $1 in 4 years at 8% 0.7350 Present value of a $1 annuity for 3 payments at 8% 2.5771 Present value of a $1 annuity for 4 payments at 8% 3.3121 Dumbbell Ltd will return the asset at the end of the lease term. Barbell Ltd incurred $1,274 to negotiate and execute the lease agreement. Dumbbell Ltd and Barbell Ltd have a reporting period ending 30 June. Question 4 continued over the page 2017 SEP 25 ACCY200 Wow Spring 2017 Page 4 of 9 sta UOW AUSTRALIA Question 4 continued Required: a) Prepare journal entries for Dumbbell Ltd (lessee) to record the initial recognition of the finance lease on 1 July 2016 and the necessary journal entries needed for the finance lease on 30 June 2017. Show all working out. (6 marks) b) Prepare journal entries for Barbell Ltd (lessor) to record the initial recognition of the finance lease on 1 July 2016 and the necessary journal entries needed for the finance lease on 30 June 2017. Show all working out. (4 marks) Question 4 Total: 10 marks Crypto Ltd leased a small aircraft from Dyno Ltd on 1 July 2018. The aircraft is in the records of Dyno Ltd at its fair value of $267 517 on 1 July 2018. In setting up the lease agreement Dyno Ltd incurred $2 200 in legal fees and stamp duty costs. The lease agreement contained the following details: Lease term Economic life of the aircraft Annual rental payments, in arrears (commencing 30/06/2019) Residual value of the aircraft at the end of the lease term Residual value of the aircraft guaranteed by Crypto Ltd Interest rate implicit in the lease PV of $1 in 3 years at 7% PV of $1 annuity at 7% with 2 payments PV of $1 annuity at 7% with 3 payments 3 years 5 years $95 000 $25 000 $10 000 7% 0.8163 1.8080 2.6243 Crypto Ltd incurred $1 528 in costs to negotiate the lease agreement and will return the aircraft to Dyno Ltd at the end of the lease term. Crypto Ltd has a reporting period ending 30 June Required: a) Calculate the lease liability and the right of use asset that Crypto Ltd will need to initially recognise at the start of the lease term. (3 marks) b) Prepare the necessary journal entries needed on 30 June 2019 in the records of Crypto Ltd in regards to the lease arrangement. (4 marks) c) Prepare the necessary journal entry needed on 1 July 2018 in the records of Dyno Ltd in regards to the lease arrangement (assume a finance lease)
