ABC Ltd signed a 4-year contract with Comp Ltd for the use of a customised machinery on 1 July 2022.ABC Ltd intends to return the asset at the end of the lease term. The leased machinery meets the criteria of a leased asset in accordance with AASB16 Leases. The following information shows the lease terms: Lease term (non-cancellable)4 yearsExpected useful life of the machinery6 yearsExpected fair value of the machinery at the end of lease term$30 000Residual value guaranteed$50 000Bargain purchase price at the end of lease term$60 000Net initial directly attributable costs (paid at 1 July 2022)$8 000Annual lease payment (paid in arrears) $70 000Interest rate implicit in the lease10% p.a. Required:Which journal entries that ABC needs to record on 1 July 2022 in relation to the lease contract?
Question
ABC Ltd signed a 4-year contract with Comp Ltd for the use of a customised machinery on 1 July 2022.ABC Ltd intends to return the asset at the end of the lease term. The leased machinery meets the criteria of a leased asset in accordance with AASB16 Leases. The following information shows the lease terms: Lease term (non-cancellable)4 yearsExpected useful life of the machinery6 yearsExpected fair value of the machinery at the end of lease term50 000Bargain purchase price at the end of lease term8 000Annual lease payment (paid in arrears) $70 000Interest rate implicit in the lease10% p.a. Required:Which journal entries that ABC needs to record on 1 July 2022 in relation to the lease contract?
Solution 1
On 1 July 2022, ABC Ltd will need to record the following journal entries in relation to the lease contract:
- Recognition of Right-of-Use Asset and Lease Liability:
First, ABC Ltd needs to calculate the present value of the lease payments. The lease payments are $70,000 per year for 4 years, discounted at the interest rate implicit in the lease, which is 10%.
The present value of the lease payments is calculated as follows:
70,000 / (1 + 10%)^2 + 70,000 / (1 + 10%)^4 = $227,079.
The initial measurement of the right-of-use asset also includes the initial direct costs, which are $8,000.
So, the journal entry on 1 July 2022 would be:
Debit Right-of-Use Asset: 227,079 + 227,079
- Payment of Initial Direct Costs:
ABC Ltd also needs to record the payment of the initial direct costs. The journal entry would be:
Debit Cash: 8,000
Please note that the calculations and journal entries may vary depending on the specific accounting policies and practices of the company. It's always best to consult with a professional accountant or auditor to ensure accurate financial reporting.
Solution 2
On 1 July 2022, ABC Ltd needs to record the following journal entries in relation to the lease contract:
- Recognition of Right-of-Use Asset and Lease Liability:
First, we need to calculate the present value of the lease payments. The lease payments are 223,107.
The right-of-use asset also includes any initial direct costs. So, the total right-of-use asset is 223,107 present value of lease payments + $8,000 initial direct costs).
The journal entry would be:
Debit Right-of-Use Asset: 223,107 Credit Cash: $8,000
- Initial Lease Payment:
Since the lease payments are made in arrears, there is no initial lease payment to be made on 1 July 2022. Therefore, no journal entry is needed for this on 1 July 2022.
Please note that the calculations are approximate and the actual values may vary slightly due to rounding or different methods of calculating the present value of lease payments.
Similar Questions
Small Ltd signed a 3-year contract with Big Ltd for the use of a machinery on 1 July 2022 with the option to purchase the machinery at the end of the lease term. It is reasonably expected that Small Ltd will exercise the bargain purchase option. The leased machinery meets the criteria of a leased asset in accordance with AASB16 Leases. The following information shows the lease terms: Lease term (non-cancellable) 3 years Expected useful life of the machinery 8 years Expected residual value of the machinery $5,000 Residual value guaranteed $40 000 Expected fair value of the machinery at the end of lease term $50 000 Bargain purchase price at the end of lease term $60 000 Net initial directly attributable costs (paid at 1 July 2022) $10 000 Initial lease payment (paid at 1 July 2022) $30 000 Annual lease payment (paid in arrears at 30 June) $80 000 Annual maintenance & insurance included in the annual lease payment $10 000 Interest rate implicit in the lease 10% p.a. Required: What is the amount of depreciation expense that Small Ltd should recognise for the year ended 30 June 2023 (rounded to the nearest dollar) in accordance with the requirements of AASB 16 Leases? Group of answer choices $32,395 $84,720 $31,770 $26,770
On 1 July 20X5, Bow Ltd leased equipment to Tie Ltd. The terms of the contract are as follows:Lease term10 yearsEconomic life of the equipment13 yearsAnnual lease payment, in arrears (commencing 30 June 20X6)$2,500Fair value of the equipment at 1 July 20X5$19,517Residual value at end of lease (not guaranteed)$2,000Residual value at end of economic lifenilInterest rate implicit in lease6%PV factor of $1 at end of one year0.9434PV factor for annuity of $1 per year for 10 years (6%)7.3601PV factor of annuity of $1 per year for 13 years (6%)8.8527PV factor of $1 at end of 10 years (6%)0.5584The lease is non-cancellable, and at the end of the lease the equipment will be returned to Bow (lessor). The lease has been classified as a finance lease by Bow.What is the reported amount of the current liability (rounded to the nearest whole dollar) in the balance sheet of the lessee at the end of 30 June 20X7 in accordance with the requirements of AASB 16 Leases?
According to AASB 16 Leases a right-of-use asset is required to be. A depreciated over the lease term, where the cost of the right-of-use lease asset reflects that the lesseewill exercise the purchase option at end of the lease termo B depreciated over the underlying asset's useful life, where the cost of the lease asset reflects that thelessee will exercise the purchase option at end of the lease termo C depreciated over the longer of the lease term and its useful life of the right-of-use lease asset, wherethe lessee will not obtain ownership at the end of the lease termo D depreciated from lease commencement to the longer of the lease term and its useful life, only wherethe economic benefits to be realised from using the asset are for a period of greater than ten years
What is the amount to be recorded as a Non-current Lease Liability in the books of ABC Ltd that is in accordance with AASB16 Leases on 30 June 2023?Group of answer choices$174,080$189,106$138,017$121,488
Ms. AC rented the vacant lot owned by Mr. X for a monthly rental of P10,000. The lease contract took effect on April 1, 2016 for a lease period of 25 years. The lessee, right after the consummation of the lease contract, constructed a commercial building on the lot costing P6,000,000 with an estimated useful life of 50 years and a residual value of P400,000. When the building was completed on January 1, 2017, the fair market value of the property was P8,000,000 per valuation made by the independent appraiser.The building will become the property of the lessor after the expiration of the lease.In addition, the annual property tax on the lot of P6,000 will be paid by the lessee.Using the spread-out method, the taxable rent income for the year 2017 will be:Select one:a.P190,500b.P222,500c.P96,000d.P254,000
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.