Westcon Management Company (WMC) leased an assembly equipment on January 1, 2019 to Manchester Corporation Limited (MCL) for a three-year period. The equipment returns to WMC when the agreement expires. Under the terms of the least three payments of $120,000 must be made by MCL per year, commencing on December 31,2019.

MCL is also required to pay $10,000 annually for insurance. In addition, MCL also guarantees a $15,000 residual value on December 31, 2021 to WMC, this is equal to the expected residual value of the equipment on December 31, 2021. Depreciation of the asset should therefore be based on this expected residual value. It has been determined that the lessees incremental borrowing rate is 14% and lessors implicit rate 12%.

You are provided with the relevant present value tables:

Year 1 Year 2 Year 3

Required:

i. ii.

PART B

PVIFA 14% 0.8772 0.7695 0.6750

PVIFA 12% 0.8929 0.7972 0.7118

Record the journal entries in the books of the MCL for years 1 and 3 only (please show the relevant calculations).

(14 marks)

Calculate the total cash payments made by the MCL over the life of the lease?

(3 marks)

The net income of Freetown Limited for the years 2015 and 2016 were computed as $315,000 and $205,000, respectively. An audit of the financial statement early in 2017 revealed the following errors:

a) The closing stock for 2015 was understated by $24,000 and closing stock for 2016 overstated by $8,950.

b) Insurance paid in 2015 for 2016 of $7,490 was charged in error as an expense in 2015.

c) During the year 2015 rent received was for 15 months, 3 months related to 2016 but no adjustments were made for the sum received of $8,550.

REQUIRED: Determine the correct net income figures for 2015 and 2016

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