Question
You work for Green Chartered Accountants as one of the consultants. Your client, Blue Gum Ltd seeks your advise on the required accounting treatment of
You work for Green Chartered Accountants as one of the consultants. Your client, Blue Gum Ltd seeks your advise on the required accounting treatment of the following transaction for the year ended 31 December 2018 Blue Gum acquired a machine under lease arrangement from Basswood. The terms of the lease agreement provides as follows: i) Blue Gum will lease the machine for five (5) years commencing 1 January 2018. ii) Blue Gum will pay rentals to Basswood of K60,000 per annum commencing on 1 January 2018. iii) Legal costs to Blue Gum to set up the lease amount to K7,040 at 1 January 2018. iv) Basswood incurs K10,000 on 1 January 2018 to make Blue Gum enter into an agreement to lease the machine. v) The interest rate implicit in the lease is 7.5% vi) The lease agreement provides for an option to Blue Gum to purchase the machine at the end of the lease term. vii) The machine has an economic useful life of 7 years at the commencement of the lease. viii) Basswood is responsible for repair and maintenance of the machine but costs of doing so will be incurred by Blue Gum. 9 Required: Advise your client on the required accounting treatment of the transactions involved in the lease in the books of Blue Gum for the two years ending 31 December 2018 and 31 December 2019. (13 marks)
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