Question
Stella ltd manufactures specialized equipment for both sale and lease. On 1 July 2022Stella Ltd leased one of these equipment to Fred Dan incurring $1200
Stella ltd manufactures specialized equipment for both sale and lease. On 1 July 2022Stella Ltd leased one of these equipment to Fred Dan incurring $1200 in costs. Freddy incurred $650 in costs. Equipment be leased cost Stella $55072 to manufacture. The equipment economic life 6years, after a residual $ 950. Length 5 year,
Commencement date 1 July 2022
Annual lease payment, payable 30 June each year commencing $15000, 30 June 2023
Residual value at the end of the lease term, fully guaranteed by Freddy Ltd $8000, Interest rate implicit in the lease 8%.
All insurance and maintenance costs are paid [ and incurred] by Stella Ltd and $ 2000 per year and will be reimbursed by Freddy Ltd by being included in the annual lease payment of $15,000. The equipment will be depreciated on a straight-line basis. It is expected that Freddy Ltd will purchase the equipment from Stella at the end of the lease.
[The bargain purchase price is equal to the guaranteed residual value of $8000, instead of returning the equipment to Stella, Freddy will likely pay $8000 to keep it].
Required
- Prepare the journal entries to account for the lease in the books of Freddy Ltd for 1 July 2022 and the year ended 30 June 2023 [provides the computation details of the present value of future annual lease payments and depreciation expense.
- Prepare the journal entries to account for the lease in the books of Stella Ltd for 1 July 2022 and the year ended 30 June 2023.
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