Question

In: Accounting

On 1 January 2010 Sleepless Ltd purchased 2 factory buildings one in Independence street and another...

On 1 January 2010 Sleepless Ltd purchased 2 factory buildings one in Independence street and another in Mandume Ndemufayo Road, for N$250 000 each. Both factory buildings were initially to be used to manufacture beds for sale to retail stores. The buildings are not specialised and could be used for a variety of manufacturing processes. The estimated useful life of each building is 15 years with no residual value.

Sleepless Ltd lost a major customer effective 1 January 2015 and as a result, had surplus factory space for their requirements. Sleepless Ltd enters a contract to lease the factory building in Mandume Ndemufayo road to a tenant with a commencement date of 1 January 2015. The lease term is 5 years. The rental payments are N$100 000 per year, payable annually in arrears and are to be increased by 20% per year over the lease term. The buildings will revert to Sleepless Ltd at the end of the contract.

Sleepless Ltd holds all investment property under the cost model.

Required:

1.1 Discuss briefly whether Sleepless Ltd should classify this lease contract as a finance

or operating lease.

1.2 Record journal entries of the factory building in Mandume Ndemufayo Road for 20 the year ended 31 December 2015,2016,2017,2018 and 2019.

Solutions

Expert Solution

Sol :

1.1

The difference between a finance lease and an operating lease lies in whether the risks and rewards incidental to ownership of the leased asset are transferred from the lessor to the lessee. Risks and rewards are considered not to be transferred if:

  1. The lease term is not major portion of the useful life of the asset;
  2. The present value of lease payments does not make substantively all the fair value of the leased asset;
  3. The leased asset is not tailor-made for the lessee but is of general nature such that it can be leased out to another party by the lessor; and
  4. The ownership of the leased asset does not transfer to the lessee at the end of the lease term   

The lease should be treated as an operating lease because:

  1. It does not transfer the ownership to lessee at the end of the lease term;
  2. The lease term is only half the total useful life of the asset; and
  3. There is no bargain purchase option (i.e. option to buy the asset at lower price at the end of the lease term).

1.2

Journal entry for the year ended 31.12.2015

Lease Rentals Receivable $100,000

To Lease Rental Income $100,000

Journal entry for the year ended 31.12.2016

Lease Rentals Receivable $120,000

To Lease Rental Income $120,000

Journal entry for the year ended 31.12.2017  

Lease Rentals Receivable $144,000

To Lease Rental Income $144,000

Journal entry for the year ended 31.12.2018

Lease Rentals Receivable $172,800

To Lease Rental Income $172,800

Journal entry for the year ended 31.12.2019

Lease Rentals Receivable $207,360

To Lease Rental Income $207,360

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Amazonia Ltd purchased Buildings for $4 million on July 1st 2010. The estimated useful life was...
Amazonia Ltd purchased Buildings for $4 million on July 1st 2010. The estimated useful life was 20 years. The estimated residual was $800,000. Amazonia Ltd applies the AASB 116 fair value (revaluation model) to recognise its Buildings. On 30th June 2014 the extract of the Balance Sheet indicated the following for Buildings. Non-Current Asset Buildings Cost                                         4,000,000                                            Accumulated Depreciation     (640,000) On 30 June 2015 the following is information for Buildings Fair Value                               $3,620,000 Cost to sell                              $100,000 Value in use                           ...
KLM Ltd purchased new equipment on 1st January 2010, at a cost of $420 000 net...
KLM Ltd purchased new equipment on 1st January 2010, at a cost of $420 000 net of GST. The company estimated that the equipment had a useful life of 5 years and a residual value of $45 000. Required Assuming a financial year ending 30th June, calculate the amount of depreciation expense for each year ending 30th June 2010 through to 30th June 2015, with each of the following methods: (a) straight line 2 marks (b) sum-of-years-digits 4 marks (c)...
On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of...
On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of its product. The invoice cost of the machine was $260,000. At the time of acquisition, the machine had an original estimated useful life of 10 years and an estimated salvage value of $20,000. Annual depreciation was recorded at $24,000 per year. The machine was depreciated using the straight-line method. On August 1, 2015, Felix exchanged the old machine for a newer model. The new...
On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of...
On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of its product. The invoice cost of the machine was $260,000. At the time of acquisition, the machine had an original estimated useful life of 10 years and an estimated salvage value of $20,000. Annual depreciation was recorded at $24,000 per year. The machine was depreciated using the straight-line method. On August 1, 2015, Felix exchanged the old machine for a newer model. The new...
Sandhill Corp. purchased land with two old buildings on it as a factory site for $454,000....
Sandhill Corp. purchased land with two old buildings on it as a factory site for $454,000. The property tax assessment (that is, assessed value) on this property was $357,000: $255,000 for the land and the rest for the buildings. It took six months to tear down the old buildings and construct the factory. The company paid $62,200 to raze the old buildings and it sold salvaged copper, lumber, and brick for $6,500. Legal fees of $1,860 were paid for title...
Ivanhoe Corp. purchased land with two old buildings on it as a factory site for $454,000....
Ivanhoe Corp. purchased land with two old buildings on it as a factory site for $454,000. The property tax assessment (that is, assessed value) on this property was $356,000: $249,000 for the land and the rest for the buildings. It took six months to tear down the old buildings and construct the factory. The company paid $60,100 to raze the old buildings and sold salvaged copper, lumber, and brick for $6,700. Legal fees of $1,860 were paid for title search...
On 1 July 2018, Adat Ltd. purchased land for $1,200,000 and buildings for $500,000 paying cash....
On 1 July 2018, Adat Ltd. purchased land for $1,200,000 and buildings for $500,000 paying cash. The estimated useful life of the buildings was 40 years, with $20,000 residual value.             On 1 October 2018 machinery was purchased for cash at a total cost of $117,000. Installation costs of $3,000 were also paid. The estimated useful life of the machinery was 4 years with an estimated residual value of $8,000. Adat Ltd. uses straight line depreciation. The entity’s balance date...
QUESTION 5       Cameron Industries Ltd purchased a new photocopier on 1 July 2010 at a...
QUESTION 5       Cameron Industries Ltd purchased a new photocopier on 1 July 2010 at a cost of $16,500. The machine has an estimated residual value of $1,500 and an estimated useful life of 5 years or 30,000 copies. Expected production for each year is 5,000, 4,000, 8,000, 7,000 and 6,000 copies respectively. The Reducing Balance rate is 35%. Required: (a)     Complete the following table for the five years of the machine’s life for each of the depreciation methods indicated.          ...
January 2010, Giant Green Company pays $3,400,000 for a tract of land with two buildings on...
January 2010, Giant Green Company pays $3,400,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $782,000, with a useful life of 25 years and a $79,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $440,500 that are expected to last another 18 years with no...
On January 2, 2018, the Mulberry Street Corporation (a calendar year corporation) purchased heavy equipment in...
On January 2, 2018, the Mulberry Street Corporation (a calendar year corporation) purchased heavy equipment in the amount of $550,000. It is expected to be used for 10 years, with a residual value at the end of that time of $70,000. Expenditures required to place the asset in service amounted to $120,000. The company also purchased a patent at a cost of $80,000 on July 1, 2018. It is expected to be used for six years, with no value at...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT