Question

On 1 July 2020, Newcastle Ltd entered into an agreement on to lease a processing plant with a fair value of $569,230 to Sydney Ltd. The terms of the lease agreement were:

Lease term	3 years
Annual rental payment, in arrears	$225,000
The total residual value of the plant at the end of lease term	$50,000
Residual value guarantee by Sydney (lessee) Ltd	$20,000

The economic life of this plant is four years. Annual rental payment commences on 30 June 2021. At the end of the lease term, the plant is to be returned to Newcastle Ltd. In setting up the lease agreement, Newcastle Ltd incurred $7,350 in legal fees and stamp duty costs. The annual rental payment includes $25,000 to reimburse Newcastle Ltd for maintenance costs incurred on behalf of Sydney Ltd.The lease is cancellable, but only with the permission of the lessor. Interest rate implicit in the lease 6%. Newcastle Ltd (lessor) treats this lease as a finance lease.

PV tables available: use link  PV Tables.pdf

REQUIRED

a) Provide journal entries for Sydney Ltd for the year ended 30 June 2021 in accordance with AASB 16 Leases. Exclude journal narrations.

b) Prepare journal entries in the records of Newcastle Ltd for the year ending 30 June 2021 in accordance with AASB 16 Leases. Exclude journal narrations.

Show all workings.

Answer 1

Newcastle Ltd entered into an agreement on to lease a processing plant with a fair value of $569,230 to Sydney Ltd. The terms of the lease agreement were:

Lease term	3 years
Annual rental payment, in arrears	$225,000
The total residual value of the plant at the end of lease term	$50,000
Residual value guarantee by Sydney (lessee) Ltd	$20,000

A) In the books of Sydney Ltd. (Lessee)

    Initial recognition:

Statement showing calculation of ROU Asset:   

Particulars	Amount
Present Value of lease payments (225000 * 2.673)	601425
Initial direct Cost (if incurred by lessee)	0
ROU	601425

Residual value guarantee shall not be considered as it is lower than estimated residual value of asset.

JOURNAL ENTRIES

ROU ASSET                                                                                                                  TO LESSOR	601425	601425
INTEREST A/C (601425 * 6%)                              TO LESSOR	36085.5	36085.5
LESSOR A/C                         TO BANK	225000	225000
DEP. ON ROU ASSET (601425-50000)/4                            TO ROU ASSET	137856.25	137856.25
PROFIT & LOSS                              TO INTEREST                              TO DEPRECIATION	173941.75	36085.5 137856.25

B) In the books of Newscastle Ltd. (Lessor)

Particulars	Amount
Present Value of lease payments (225000 * 2.673)	601425
Initial direct Cost (if incurred by lessee)	0
Residual Value Guarantee(30000*.84)	16800
ROU	626625

JOURNAL ENTRIES

LEASE RECEIVABLE                            TO ASSET	626625	626625
LEASE RECEIVABLE                              TO INTEREST INCOME	36085.5	36085.5
BANK A/C                         TO LEASE RECEIVABLE	225000	225000
INTEREST                            TO PROFIT & LOSS	36085.5	36085.5