Summer Ltd entered into an agreement on 1 July 2010 to lease a harvester to Fiel
ID: 2385791 • Letter: S
Question
Summer Ltd entered into an agreement on 1 July 2010 to lease a harvester to Field Ltd. The lease agreement details are as follows:Length of lease: 5 years
Annual lease payment, payable on 30 June each year: $8 000
Estimated useful life of harvester: 8 years
Fair value of harvester at 1 July 2010: $34 747
Estimated residual at end of useful life: $2 000
Residual at end of lease term (50% guaranteed) by Field Ltd: $7 200
Interest rate implicit in the lease: 9%
Additional information:
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation.
Field Ltd Ltd does not intend to buy the harvester at the end of the lease term.
Summer Ltd incurred costs of $1 000 to negotiate and execute the lease agreement.
Summer Ltd purchased the harvester for $34 797 just before the inception of the lease.
Required
Prepare a schedule of lease payments for Field Ltd, a schedule of lease receipts for Summer Ltd and journal entries to record the lease transactions for the year ended 30 June 2011 in the records of both companies
Explanation / Answer
length of lease: 5 years Annual lease payment, payable on 30 June each year: $8 000 Estimated useful life of harvester: 8 years Fair value of harvester at 1 July 2010: $34 747 Estimated residual at end of useful life: $2 000 Residual at end of lease term (50% guaranteed) by Field Ltd: $7 200 Interest rate implicit in the lease: 9% The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Field Ltd Ltd does not intend to buy the harvester at the end of the lease term. Summer Ltd incurred costs of $1 000 to negotiate and execute the lease agreement. Summer Ltd purchased the harvester for $34 797 just before the inception of the lease.
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