In: Accounting
Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. Lessor has no material initial direct costs.
Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years.
• Lease payments: $50,000 at the beginning of each year.
• First lease payment: 1 July 2019.
• Lease expires: 1 July 2023.
• Interest rate implicit in the lease: 8 per cent.
• Guaranteed residual: $40 000.
Required:
a) Determine the fair value of the portable sound recording studio at 1 July 2019
b) Prepare a schedule for the lease payments incorporating accrued interest expense.
c) Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and 1 July 2020
d) At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023.
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