QUESTION 5: LEASES This question is made up of two (2) parts. Both are compulsory Part A Briefly explain three possible adverse effects on a lessee entity's financial statements arising (7 marks) from the classification of a lease arrangement as a finance lease Part B Kiwi Ltd leased an asset to Link Ltd on 1 April 2015. The lease was for an item of machinery that at the inception of the lease had a fair value of $76,800 The terms of the lease included the following details Date of entering the lease Duration of the lease Economic life Salvage value at end of life Guaranteed residual value Lease payments are made on 31 March each year commencing 31 March 2016 Fair value of the leased asset Implicit interest rate 1-Apr-15 3 years 6 years Nil Nil 31,000 $76,800 7% p.a Included within the lease payment is an amount of $1,750 representing payment to the lessor for the insurance and maintenance of the machinery. Both companies use straight line depreciation for similar assets Required a) Calculate the Present Value of Minimum Lease Payments for this lease b) (2 marks) Complete the repayment schedule provided in the Yellow Answer Booklet for the Lessee- (4 marks) Provide the journal entries associated with the leased machinery for the lessee at 1 April (7 marks) TOTAL MARKS: 20] Link Lto c) 2015, and 31 March 2016 (at the end of the first year). Narrations are not required QUESTION 5: LEASES This question is made up of two (2) parts. Both are compulsory Part A Briefly explain three possible adverse effects on a lessee entity's financial statements arising (7 marks) from the classification of a lease arrangement as a finance lease Part B Kiwi Ltd leased an asset to Link Ltd on 1 April 2015. The lease was for an item of machinery that at the inception of the lease had a fair value of $76,800 The terms of the lease included the following details Date of entering the lease Duration of the lease Economic life Salvage value at end of life Guaranteed residual value Lease payments are made on 31 March each year commencing 31 March 2016 Fair value of the leased asset Implicit interest rate 1-Apr-15 3 years 6 years Nil Nil 31,000 $76,800 7% p.a Included within the lease payment is an amount of $1,750 representing payment to the lessor for the insurance and maintenance of the machinery. Both companies use straight line depreciation for similar assets Required a) Calculate the Present Value of Minimum Lease Payments for this lease b) (2 marks) Complete the repayment schedule provided in the Yellow Answer Booklet for the Lessee- (4 marks) Provide the journal entries associated with the leased machinery for the lessee at 1 April (7 marks) TOTAL MARKS: 20] Link Lto c) 2015, and 31 March 2016 (at the end of the first year). Narrations are not required
