Question

On 1 July 2023, Sherlock Ltd leased a processing plant to Holmes Ltd. The plant was purchased by Sherlock Ltd on 1 July 2023 for its fair value of $348 942. The lease agreement contained the following provisions:

Lease term	3 years
Economic life of plant	5 years
Annual rental payment, in arrears (commencing 30/6/24)	$120 000
Residual value at end of the lease term	$50 000
Residual guaranteed by lessee	$30 000
Interest rate implicit in lease	8%
The lease is cancellable only with the permission of the lessor.

Holmes Ltd intends to return the processing plant to Sherlock Ltd at the end of the lease term. The lease has been classified as a finance lease by Sherlock Ltd.

Required

1. Prepare:

1. the lease payments schedule for Holmes Ltd (show all workings)
2. the journal entries in the records of Holmes Ltd for the year ended 30 June 2025.

2. Prepare:

1. the lease receipts schedule for Sherlock Ltd (show all workings)
2. the journal entries in the records of Sherlock Ltd for the year ended 30 June 2025.

Answer 1

1)
PV of LP

   = [$120 000 * 2.5771 (T2, 8%, 3years)] + [$30 000 * 0.7938 (T1,8%,3yrs)]
   = [$309,252 + $23,814]
   = $333,066

   Lease receipts   Interest revenue (8%)   Reduction in receivable   Balance of liability     
01-Jul-23               333,066     
30-Jun-24   120,000   26,645   93,355   239,711     
30-Jun-25   120,000   19,177   100,823   138,888     
30-Jun-26   150,000   11,111   138,888         
   390,000   56,934   333,066         

b)

Date   Particulars   Debit   Credit     
30-Jun-25   Lease liability   100,823         
   Interest expense   19,177         
   Cash       120,000     
   (Second lease payment)             
                 
   Depreciation expense   101,022         
   Accumulated depreciation             
   ($333,066 – $30,000) / 3 years       101,022     
   (Depreciation of the leased asset for the year)             

2)
a)
   Lease receipts   Interest revenue (8%)   Reduction in receivable   Balance of receivable     
01-Jul-23               348,942     
30-Jun-24   120,000   27,915   92,085   256,857     
30-Jun-25   120,000   20,549   99,451   157,406     
30-Jun-26   170,000   12,592   157,406         
   410,000   61,057   348,942         

PV of LP = {$120 000 * 2.5771 [T2, 8%, 3yrs]} + {[$30 000 * 0.7938 [T1, 8%, 3yrs]}
   = [$309,252 + $23,814]
   = $333,066
PV of UGRV = [$20 000 * 0.7938 [T1, 8%, 3yrs] = $15,876

b)
Date   Particulars   Debit   Credit     
30-Jun-25   Cash   120,000         
   Interest expense       20,549     
   Lease receivable       99,451     
   (Second lease receipt)