Sign in to edit and save changes to this file HS011 Advanced Frandal Accounting
ID: 2413937 • Letter: S
Question
Sign in to edit and save changes to this file HS011 Advanced Frandal Accounting Trimester 3/2016 Page 3 of 4 Required: a) b) Prepare the journal entries for the costs incurred 2014, 2015 and 2016 (using the area-of-interest method of accounting) (13 marks) Explain the difference between Area of Interest method and Full-cost method? (2 marks) Question 6 (15 marks) Alfalfa Machinery P/L enters into a lease (to a lessee) agreement and leases harvesting equipment to Bushel Holdings Ltd. The lease consists of the following Date of inception: Duration of lease: Life of leased asset: Lease payments (annual) 4 years 5 years $160,000 (annual) includes $15,000 for . maintenance and insurance costs per annum $70,000 (added to final payment Implicit rate of interest is 11.5% (is this the actual rate?) Fair value: S490.384 The asset was acquired on 12/11/2012 Required: a) Check that the implicit rate is correct against FV. (4 marks) b) Do the journal entries for the Lessor (using the Net Method) for acquisition, transfer of control, annual payments (2013 and 2014) and for final payment (2016) (9 marks) Explain the difference between a Finance lease and an Operating lease (2 marks) c)Explanation / Answer
a) Against the Fair Value, implicit rate would be correct, if the present value of cash-flows net of cost received equals Fair Value of equipment, when discounted using implicit rate. So, we need to calculate present value of all cash-flows.
Cash-flow net of cost = $160,000 - $15,000 = $145,000
Formulas:
Present value of equal periodic cash-flow = C*{[1-(1+r)-n] / r}
Present value of single cash flow = Cash Flow / (1+r)n
Present Value of annual payment = $145,000*{[1-(1+0.115)-4] / 0.115} = $445,094
Present Value of addition to final payment = $70,000 / (1+0.115)4 = $45,290
Net Present Value = $445,094 + $45,290 = $490,384
Since the present value is equal to the Fair Value, the implicit rate is correct.
b)
Entries in 2013
Date
Particulars
Debit
Credit
12/11/2012
Equipment A/C
490,384
Cash A/C
490,384
01/01/2013
Lessee A/C
550,384
Equipment A/C
490,384
Provision for Maintenance & Insurance
60,000
31/12/2013
Cash A/C
160,000
Lessee A/C
145,045
Interest A/C
14,955
31/12/2013
Maintenance & Insurance A/C
15,000
Cash A/C
15,000
31/12/2013
Provision for Maintenance & Insurance
15,000
Maintenance & Insurance A/C
15,000
Same entries will be made in following years.
Entries in 2016
Date
Particulars
Debit
Credit
12/11/2012
Cash A/C
230,000
Lessee A/C
154,108
Interest A/C
75,896
C) In a “Finance Lease”, the risk of owning the asset gets transferred to the lessee and the lessee assumes all these risks. On the other hand, in an “Operating Lease”, all these risks remain with the lessor.
Entries in 2013
Date
Particulars
Debit
Credit
12/11/2012
Equipment A/C
490,384
Cash A/C
490,384
01/01/2013
Lessee A/C
550,384
Equipment A/C
490,384
Provision for Maintenance & Insurance
60,000
31/12/2013
Cash A/C
160,000
Lessee A/C
145,045
Interest A/C
14,955
31/12/2013
Maintenance & Insurance A/C
15,000
Cash A/C
15,000
31/12/2013
Provision for Maintenance & Insurance
15,000
Maintenance & Insurance A/C
15,000
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