Question

In: Accounting

On 1 July 2017, Webster Motors Ltd acquired equipment under a four-year finance lease agreement. The...

On 1 July 2017, Webster Motors Ltd acquired equipment under a four-year finance lease agreement. The present value of the lease payments is $431,213. It has an estimated useful life of five years and an estimated residual value of $31,213. The implicit rate of interest on the lease was 8% per annum. The lease involved five payments, an initial payment of $100,000 and four annual payments on 30 June each year of $100,000.

Webster Motors Ltd will retain the equipment at the end of the lease.

Required:

  1. You are the accountant at Webster Motors Ltd and one of the major shareholders has asked you to clarify the reasons for the way the lease is reported in the Financial Statements. Write a brief comment for the shareholder explaining the treatment of the lease, including the effect of the lease on any related items in the income statement and balance sheet of Webster Motors Ltd.
  2. Complete a lease schedule for the four years up to and including 30 June 2021.
  3. Record the necessary general journal entries relating to the lease in the year ending 30 June 2019. Narrations are not required.
  4. Prepare the Income Statement for the year ended 30 June 2019.
  5. Prepare the Balance Sheet extract as at 30 June 2019.

Solutions

Expert Solution

a.) The lease will be treated as as Capital Lease because the Webster motors ltd (lessee ) will retain the equipment at the end of the lease. The lease liability & right of use assets will be recorded with $ 431,213. Interest expense will be booked on income statement every year as per schedule below in point b.
b.) Lease Schedule
Date Lease Payment $ Interest Expense @8% Reduction in lease laibility Lease liability $
01-07-2017         431,213
01-07-2017                         100,000                                        -                                     100,000         331,213
30-06-2018                         100,000                               26,497                                      73,503         257,710
30-06-2019                         100,000                               20,617                                      79,383         178,327
30-06-2020                         100,000                               14,266                                      85,734            92,593
30-06-2021                         100,000                                 7,407                                      92,593                      0
Total                        500,000                               68,787                                  4,31,213
c.) Date Account Titles Debit $ Credit $
30-06-2019 Lease Liability                               79,383
Interest Expense                               20,617
Cash                                   100,000
30-06-2019 Amortization Expense                            107,803
Right of use assets                                   107,803
(431,213 / 4 )
d.) Income Statement-30 June 2019
Amount in $
Interest Expense                            20,617
Amortization Expense                         107,803
e.) Balance Sheet- 30 June 2019
Amount in $
Assets
Right of use assets                         215,607
(431,213 - 107,803 - 107,803 )
Liabilities
Lease Liability                         178,327

Related Solutions

On 1 July 2017, Webster Motors Ltd acquired equipment under a four-year finance lease agreement. The...
On 1 July 2017, Webster Motors Ltd acquired equipment under a four-year finance lease agreement. The present value of the lease payments is $431,213. It has an estimated useful life of five years and estimated residual value of $31,213. The implicit rate of interest on the lease was 8% per annum. The lease involved five payments, an initial payment of $100,000 and four annual payments on 30 June each year of $100,000. Webster Motors Ltd will retain the equipment at...
Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance...
Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the lease contains an option for Lessee to purchase the equipment at the end of the lease and the Lessee is reasonably certain to exercise that option. The arrangement provides the following: Lease term Four years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter Annual payments, beginning at lease commencement and annually...
Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance...
Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the lease contains an option for Lessee to purchase the equipment at the end of the lease and the Lessee is reasonably certain to exercise that option. The arrangement provides the following: Lease term Four years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter Annual payments, beginning at lease commencement and annually...
On 1 July 2019, BrixtonLtd entered into a five-year lease agreement with Reliable Finance Ltd for...
On 1 July 2019, BrixtonLtd entered into a five-year lease agreement with Reliable Finance Ltd for an item of machinery. Brixton Ltd incurred initial direct costs of $658 to negotiate and arrange the lease. The lease agreement requires BrixtonLtd to make five annual lease payments of $20,000 per year paid at the beginning of each year (in advance: annuity due) on 1 July with the first payment on 1 July 2019. At the end of the lease term, BrixtonLtd will...
On 1 July 2020, Brooklyn Ltd (lessor) leased Equipment to New Ltd (lessee). The lease agreement...
On 1 July 2020, Brooklyn Ltd (lessor) leased Equipment to New Ltd (lessee). The lease agreement contained the following: Annual Lease receivable on 1 July (in advance) $50,000 Lease Receivable on 1 July 2020 – measured at NPV net of initial lease receipts $176,992 What would be the journal entries on 1 July 2020 for the lessor (Brooklyn Ltd)?
On July 1, 2020, AMC entered into a lease agreement to lease specialty equipment for a...
On July 1, 2020, AMC entered into a lease agreement to lease specialty equipment for a 6-year term. Annual lease payments are $20,000, payable at the beginning of each lease year (July 1). At the end of the lease the leased asset will revert to the lessor. The asset’s economic life is estimated at 7 years. AMC could have obtained equivalent financing from its bank at a rate of 14%. AMC’s fiscal year end is December 31. AMC uses straight-line...
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN...
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following:  Date of inception: 1/1/15  Duration of lease: 4 years  Life of leased asset: 5 years  Lease payments (annual):$550 000 (annual) which includes $80 000 for Maintenance and insurance costs per annum.  Guaranteed residual value (Added to final payment): $190 000  Interest rate: 7% Formula for PV...
Lessee enters into a three-year lease of equipment and concludes that the agreement is a finance...
Lessee enters into a three-year lease of equipment and concludes that the agreement is a finance lease because the lease term is for a major part of the remaining economic life of the underlying asset (also three years). In addition, Lessee pays initial direct costs of $3,000. Also, assume that Lessee has guaranteed the residual value of the equipment at the end of the lease term, has concluded that it is probable that Lessee will owe $6,000 to Lessor as...
Lessee enters into a three-year lease of equipment and concludes that the agreement is a finance...
Lessee enters into a three-year lease of equipment and concludes that the agreement is a finance lease because the lease term is for a major part of the remaining economic life of the underlying asset (also three years). In addition, Lessee pays initial direct costs of $3,000. Also, assume that Lessee has guaranteed the residual value of the equipment at the end of the lease term, has concluded that it is probable that Lessee will owe $6,000 to Lessor as...
Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1....
Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT