Question

Question 4:

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.

this is the full question. Please don't copy other CHEGG ANSWERS because they are not answered according to the question. please answer according to question and marks

Answer 1

A. Determination of portable sound recording studio at 1 july 2019

present value of preodic rental payments = yearly rental payments x PV anuuity Factor @ 8%

= $50000 x 3.5771

= $178,855

Present value of Guranteed residual = Guranteed residual value x PV factor @ 8%

= $40000 x 0.7350

= $29400

Lease liability = PV of rental payments + PV of guranteed residual value

= $178855 + $29400 = $208,255

Fair value of portable sound record studio at 1 july 2019 is $$208,255

B. Schedule for the lease payment including expenses of interest

C. Journal entries in the books of Hopeful ltd at following dates

Date	particulars	Amounts in $ DR	Amount in $ CR
1/07/2019	Lease studio Dr. To Lease Liability	208255	208255
30/06/2020	Interest expenses To Interest payble	12660	12600
30/06/2020	Depreciation a/c Dr. To Accumulated depreciation leased studio ($208255 - $40000) / 4 Years	42064	42064
01/07/2020	Lease liability a/c Dr. Interest Payble a/c Dr. To Cash	37340 12660	50000

D. Journal entries for Return of assest to leasor and settlement of obligations under the lease on 1 july 2023 in the books of Hopeful ltd.

Date	Particulars	Amount in $ Dr.	Amount in $ Cr.
01/07/2023	accumulated depreciation lease studio a/c Dr. To Lease studio ($208255 - $40000)	168255	168255
01/07/2023	Lease liability a/c Dr. Interest payble a/c Dr. To Lease studio	37036 2964	40000
01/07/2023	Loss on residual value To cash	15000	15000