(a) Lucky Limited purchased two pieces of equipment from Great Machinery and lea
ID: 2517661 • 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 S6,505 per quarter payable at the end of each quarter (31 March, 30 June, 30 September, and 31 December). The equipment 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 beginning of each year. The remaining useful life of the 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 IWQ leases. (ii) (10 marks) Prepare the appropriate entries for Lucky Limited, for the inception of these two leases for (5 marks) Equipment A and Equipment B on 1 January 2017.Explanation / Answer
i) Equipment A: This should be treated as operating lease as the equipment is brand new and has a useful life of 7 years out of which only for 4 years it is being leased out
Equipment B: This should be considered as a finance lease as the asset is being leased out for most of the useful life of the asset
ii)
Equipment A
No journal entry is made at the inception of the lease
Equipment B
Dr. Lease receivable 29010
Cr. Asset 29010
29010 is the present value of future lease paymenents discounted at 12%
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