Assignment:
Objectives
This assessment item relates to the following course learning outcomes:
1. Interpret the technical requirements and conceptual aspects of selected accounting standards that address key issues in financial reporting
2. Apply relevant accounting pronouncements and professional judgment to solve routine accounting problems
Question 1
On 1 July 2012, Bird Ltd entered into a lease arrangement for the lease of equipment from Nest Ltd. The equipment had a fair value of $115 000 on 1 July 2012. The equipment had a useful life of 6 years, and both companies used straight-line depreciation. The lease is a finance lease. The following information relates to the lease arrangement:
1. The lease term is 5 years, with the equipment being returned at the end of this term.
2. Annual lease payments of $33 000 are made on 30 June of each year, the first being made on the 30 June 2013. The annual lease payment includes an amount of $3 000 to cover annual maintenance.
3. The estimated residual value of the equipment at the end of the lease term is $9 000, while Bird Ltd only guarantees $5 000 of the residual value? With an implicit interest rate of 10%, the present value of an annuity of $1, for 5 payments, is 3.7098, and the present value of a $1 in 5 years time is 0.6209.
Required:
a) Calculate the present value of minimum lease payments for Bird Ltd (round to the nearest dollar, show all working out).
b) Prepare the journal entry(s) to record the lease in the books of Bird Ltd for 1 July 2012.
c) Calculate annual depreciation on the leased equipment that Bird Ltd will have to record (round to the nearest dollar, show all working out).
Question 2
Cliff Ltd entered into an agreement on 1 July 2014 to lease a piece of equipment from Bridge Ltd. The fair value of the equipment on 1 July 2014 was $31 000. At the inception of the lease, the following terms were determined:
Lease term 3 years
Economic life of equipment
Annual rental payments 4 years
(first payment made 1 July 2014, i.e. in advance) $12 000
Residual value of equipment at end of lease term $6 000
Residual value guaranteed by Cliff Ltd $4 000
Interest rate implicit in the lease 9%
The lease is a finance lease and Cliff Ltd will return the equipment to Bridge Ltd at the end of the lease term. The annual rental payments include $2 000 to reimburse Bridge Ltd for the maintenance costs it will incur on behalf of Cliff Ltd.
Additional information:
Period or number of payments PV of $1 at 9% PV of an annuity of $1 per period for n periods at 9%
2 0.8417 1.7591
3 0.7722 2.5313
4 0.7084 3.2397
Required:
(a) Calculate the present value of minimum lease payments.
(b) Prepare journal entries in the books of Cliff Ltd to account for transactions occurring on 1 July 2014, 30 June 2015 and 1 July 2015.