Question - Lease classification and accounting
Birkenhead Ltd has entered into an agreement to lease a D9 Bulldozer to Albert Ltd. The lease agreement details are as follows:
Length of lease 5 years
Commencement date 1 July 2013
Annual lease payment, payable 30 June $8,000 each year commencing 30 June 2014
Fair value of the bulldozer at 1 July, 2013 $34,797
Estimated economic life of the bulldozer 8 years
Estimated residual value of the plant at the $2,000 end of its economic life
Residual value at the end of the lease term, of which 50% is guaranteed by Ballarat Ltd $7,200
Interest rate implicit in the lease 9%
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Albert Ltd does not intend to buy the bulldozer at the end of the lease term. Birkenhead Ltd incurred $1,000 to negotiate and execute the lease agreement. Birkenhead Ltd purchased the bulldozer for $34,797 just before the inception of the lease.
Required
State how both companies should classify the lease. Give reasons for your answer.
Prepare a schedule of lease payments for Albert Ltd.
Prepare a schedule of lease receipts for Birkenhead Ltd.
Prepare journal entries to record the lease transaction for the year ended 30 June 2014 in the record of both companies.
Prepare an appropriate note to the financial statements of both companies as at 30 June 2014.