(a)Lucky Limited purchased two pieces of equipment from Great Machinery and leas
ID: 2513847 • Letter: #
Question
(a)Lucky Limited purchased two pieces of equipment from Great Machinery and leased them to Forever Company. The details of the lease agreement are shown as below:Equipment A: The lease was entered on 1 January 2017 for a four-year period. The rental was $6,505 per quarter payable at the end of each quarter(31 March, 30 June, 30 September, and 31 December). The equpment was brand new at the inception of the lease and the remaining useful life at the date of the agreement was seven years The fair value of the asset at the date of the contract was $70, 500. The implicit interest rate was 20%.
Equipment B: The lease was entered on 1 January 2017 for a six-year period. The rental was $6,300 per year payable at the begining of each year. The remaining useful life of he equipment is estimated to be seven years. The fair value of the asset at the date of the contract was $65,000. The implicit interest rate was 12%.
Lucky Limited considers the collectability of the lease payments is reasonably predictable, and there is no future cost to be incurred.
Required: (Answers should be rounded to the nearest dollar.)
(i)Explain how Lucky Limited should classify these TWO leases.
(ii)Prepare the appropriate entries for Lucky Limited, for the inception of these two leases for Equipment A and Equipment B on 1 January 2017.
(a)Lucky Limited purchased two pieces of equipment from Great Machinery and leased them to Forever Company. The details of the lease agreement are shown as below:
Equipment A: The lease was entered on 1 January 2017 for a four-year period. The rental was $6,505 per quarter payable at the end of each quarter(31 March, 30 June, 30 September, and 31 December). The equpment was brand new at the inception of the lease and the remaining useful life at the date of the agreement was seven years The fair value of the asset at the date of the contract was $70, 500. The implicit interest rate was 20%.
Equipment B: The lease was entered on 1 January 2017 for a six-year period. The rental was $6,300 per year payable at the begining of each year. The remaining useful life of he equipment is estimated to be seven years. The fair value of the asset at the date of the contract was $65,000. The implicit interest rate was 12%.
Lucky Limited considers the collectability of the lease payments is reasonably predictable, and there is no future cost to be incurred.
Required: (Answers should be rounded to the nearest dollar.)
(i)Explain how Lucky Limited should classify these TWO leases.
(ii)Prepare the appropriate entries for Lucky Limited, for the inception of these two leases for Equipment A and Equipment B on 1 January 2017.
(a)Lucky Limited purchased two pieces of equipment from Great Machinery and leased them to Forever Company. The details of the lease agreement are shown as below:
Equipment A: The lease was entered on 1 January 2017 for a four-year period. The rental was $6,505 per quarter payable at the end of each quarter(31 March, 30 June, 30 September, and 31 December). The equpment was brand new at the inception of the lease and the remaining useful life at the date of the agreement was seven years The fair value of the asset at the date of the contract was $70, 500. The implicit interest rate was 20%.
Equipment B: The lease was entered on 1 January 2017 for a six-year period. The rental was $6,300 per year payable at the begining of each year. The remaining useful life of he equipment is estimated to be seven years. The fair value of the asset at the date of the contract was $65,000. The implicit interest rate was 12%.
Lucky Limited considers the collectability of the lease payments is reasonably predictable, and there is no future cost to be incurred.
Required: (Answers should be rounded to the nearest dollar.)
(i)Explain how Lucky Limited should classify these TWO leases.
(ii)Prepare the appropriate entries for Lucky Limited, for the inception of these two leases for Equipment A and Equipment B on 1 January 2017.
Explanation / Answer
Ans to part (i)
Operating Vs Finance leases :
On the basis of above discussion, we can conclude as follows:
1) Equipment A will be treated as Operating lease as asset is new and having more useful life than term of lease.
2) Equipment B will be treated as Finance lease since useful life of asset is nearabout term of lease.
Ans to part ii Journal entries at inception
?Equipment A :
Cash A/c Dr $6,505
To Lease Rental Income $6,505
Equipment B:
Forever Company A/c Dr $65,000
To Equipment B A/c $65,000
(At the time of inception)
Cash A/c Dr $ 6,300
To Forever Company $ 5,625 (6300 - 675)
To Financial Income $ 675 (12% interest embedded in installment)
(First installment received)
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