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In: Accounting

On 30 June 2015, Rahway Prison Ltd arranged to lease equipment from Cheapa Finance Co. Limited....

On 30 June 2015, Rahway Prison Ltd arranged to lease equipment from Cheapa Finance Co. Limited. At the inception of the lease, the equipment had a fair value of $1 100 000, an estimated useful economic life of 10 years, and estimated scrap value of $Nil. Rahway Prison Ltd intends to purchase the equipment at the end of the lease term for its guaranteed residual value. The lease term is 7 years and payments of $237 692 are due in advance on 30 June each year. The guaranteed residual value of the equipment at the end of the lease term is $200 000. If the lease is cancelled by Rahway Prison Ltd a cancellation payment of $500 000 applies. The interest rate implicit in the lease is 24% p.a.

Required

         Prepare the lease repayment schedule.

         On the basis that the lease is a finance lease, prepare the journal entries of Rahway Prison in respect of all years.

Solutions

Expert Solution

LEASE PAYMENT SCHEDULE

Rahway Prison Ltd (Lessee)

Schedule of lease payments

                                  MLP            Interest             Liability             Liability

                                                      expense           reduction              balance

                                              $                   $                        $                       $

30 June 2015                                                                                      1 000 000

30 June 2015                237 692                                      237 692            762 308

30 June 2016                237 692            182 954                54 738            707 570

30 June 2017                237 692            169 817                67 875            639 695

30 June 2018                237 692            153 527                84 165            555 530

30 June 2019                237 692            133 327              104 365            451 165

30 June 2020                237 692            108 280              129 412            321 753

30 June 2021                237 692              77 221              160 471            161 282

30 June 2022                200 000            38 718*              161 282                     –

*includes adjustment for the effect of rounding

JOURNAL ENTRIES

30 June 2015

        Leased Equipment                                    Dr         1 000 000

                    Lease Liability                              Cr                                      1 000 000

            (Initial recognition of finance lease)

        Lease Liability                                         Dr            237 692

                    Cash                                              Cr                                         237 692

            (First lease payment in advance)

30 June 2016

        Lease Liability                                         Dr              54 738

        Interest Expense                                       Dr            182 954

                    Cash                                              Cr                                         237 692

            (Second lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 1, $1 000 000 ÷ 10)

30 June 2017

        Lease Liability                                         Dr              67 875

        Interest Expense                                       Dr            169 817

                    Cash                                              Cr                                         237 692

            (Third lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 2, $1 000 000 ÷ 10)

30 June 2018

        Lease Liability                                         Dr 84165

        Interest Expense                                       Dr            153527

                    Cash                                              Cr                                         237 692

            (fourth lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 3, $1 000 000 ÷ 10)

30 June 2019

        Lease Liability                                         Dr 104365

        Interest Expense                                       Dr            133327

                    Cash                                              Cr                                         237 692

            (fifth lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 4, $1 000 000 ÷ 10)

30 June 2020

        Lease Liability                                         Dr 129412

        Interest Expense                                       Dr 108280

                    Cash                                              Cr                                         237 692

            (Sixth lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 5, $1 000 000 ÷ 10)

30 June 2021

        Lease Liability                                         Dr 160471

        Interest Expense                                       Dr 77221

                    Cash                                              Cr                                         237 692

            (Seventh lease payment in advance)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 6, $1 000 000 ÷ 10)

30 June 2022

        Lease Liability                                         Dr 161282

        Interest Expense                                       Dr 38718

                    Cash                                              Cr                                         200000

            (final lease payment)

        Depreciation Expense                               Dr            100 000

                    Accumulated Depreciation           Cr                                         100 000

            (Depreciation for year 7, $1 000 000 ÷ 10)

ekkarill92 answered 1 year ago
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