Question

On 1 July 2020, Sherlock Ltd leased a processing plant to Holmes Ltd. The plant was purchased by Sherlock Ltd on 1 July 2020 for its fair value of $467 112. The lease agreement contained the following provisions:

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. (a) the lease payments schedule for Holmes Ltd (show all workings)

   2. (b) the journal entries in the records of Holmes Ltd for the year ended 30 June 2022.

2. Prepare:

   1. (a) the lease receipts schedule for Sherlock Ltd (show all workings)

   2. (b) the journal entries in the records of Sherlock Ltd for the year ended 30 June 2022.

Answer 1

Answer-

Ans: 1. (a) Lease payments schedule.

Holmes Ltd ( Lessee ) Schedule of lease payments
	LP $	Interest expense $	Liability reduction $	Liability balance $
1 July 2020				*442,623
30 June 2021	150,000	30,984	119,016	323,607
30 June 2022	150,000	22,652	127,348	196,259
30 June 2023	210,000	13,741	196,259
	510,000	67,377	442,623

Workings:

*PV of LP = $150,000 x 2.6243 (T2 7% 3y) + $60,000 x 0.8163 (T1 7% 3y)

= $393,645 + $48,978

= $442,623.

.

Ans: 1. (b) Journal entries for the year ended 30 June 2022.

Holmes Ltd ( Lessee)

Journal entries

Date	Particulars	Dr. $	Cr. $
30 June 2022	Lease liability..................Dr.	127,348
	Interest expense.............Dr.	22,652
	Cash ( Second lease payment)		150,000
	Depreciation expense...................................Dr.	127,541
	Accumulated depreciation ( Depreciation for the year) [( $442,623 - $60,000) / 3 ]		127,541

.

Ans: 2. (a) Lease receipts schedule.

Sherlock Ltd ( Lessor ) Lease receipts schedule
	LR $	Interest revenue $	Receivable reduction $	Receivable balance $
1 July 2020				467,112
30 June 2021	150,000	32,698	117,302	349,810
30 June 2022	150,000	24,487	125,513	224,297
30 June 2023	240,000	15,703	224,297
	540,000	72,888	467,112

.

Ans: 2. (b) Journal entries for the year ended 30 June 2022.

Sherlock Ltd ( Lessor)

Journal entries

Date	Particulars	Dr. $	Cr. $
30 June 2022	Cash..................................Dr.	150,000
	Interest revenue		24,487
	Lease receivable ( Second lease receipt )		125,513