Chapter 6: Leases Chapter Review Solutions

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1 Chapter 6: Leases Chapter Review Solutions 1. ( a ) Lease A lease is a means of obtaining the use of, or financing the acquisition of, assets. They are contracts which, in exchange for consideration, give the party making the consideration (the lessee), the right to possess and use the property of the receiver of the consideration (the lessor). ( b ) Finance Lease A lease which transfers from the lessor to the lessee the risks and rewards of ownership of the leased property. ( c ) Operating Lease A lease other than a finance lease. ( d ) Fair Value The amount for which an asset could be exchanged or liability settled between knowledgeable, willing parties in an at arm's length transaction (usually the selling price). ( e ) Useful Life of Leased Property Estimated remaining period from the commencement of the lease term, without limitation by the lease term, over which the economic benefits embodied in the asset are expected to be consumed by the entity. 2. ( a ) For potential advantage of leasing see text. For potential disadvantage of leasing see text. ( b ) See text. ( c ) See text. ( d ) See text. 3. ( a ) Operating lease. Lease term is not for major part of life of the asset. ( b ) Operating lease. Lease term is not for major part of life of the asset. also present value of minimum lease payments not substantially all of fair value. ( c ) Finance lease. The lease is non-cancellable and ownership is transferred at the end of the lease term. ( d ) Finance lease. Present value of minimum lease payments at inception of lease is substantially all of fair value of leased property ( 540,720 / 600,000 = 90.12% ) and the lease term (5 years) is for a major part of the economic life of the asset (7 years). The lease term (5 years) is for a major part of the economic life of the asset (7 years) ( e ) Operating lease. Lease term is not for major part of life of the asset. Present value of minimum lease payments is not substantially all of fair value. $800 x = $10,049 $10,049 / $13,000 = 77.3% 124

2 Chapter 6: Leases - Solutions 4. Dr Hope General Journal Details Debit Credit Lease expense 1,050 Cash at Bank 1,050 Entry to record lease transaction 5. ( a ) ( i ) An agreement conveying the right to use an asset in return for a series of payments, and which effectively transfers substantially all the risks and rewards incidental to ownership. ( ii ) Under the finance lease, the possession passes to the lessee but ownership remains with the lessor until the end of the lease but ownership would normally pass to the lessee at the end of the lease. In the case of outright purchase both property and ownership possession pass from the seller to the buyer at the time of purchase. ( iii ) In an operating lease the lessor retains substantially all the risks and rewards incidental to ownership. ( b ) ( i ) Total payments to 30/6/10 $792 x 2 = $1,584 at 30 June 2008 is $39,212 (46 to run), Interest 796, Principal reduction 788. ( ii ) due at 30 June 2011 is $34, ( a ) Minmetal Company General Journal 30/6/10 Lease expense 13,500 Cash at bank 13,500 Initial lease payment ( b ) Minmetal Company s to and forming part of the financial statements Total lease expenditure contracted for at balance date but not provided for in the accounts, payable: Not later than one year 162,000 Later than one year but not later than five years 148,500 Later than five years Nil 125

3 7. Period Ended Magic Photos Schedule of Lease Payments Minimum Lease Interest Principal Payment 01/01/10 30,000 31/12/10 10,721 4,800 5,921 24,079 31/12/11 10,721 3,852 6,869 17,210 31/12/12 10,721 2,753 7,968 9,242 31/12/13 10,721 1,479 9, ,884 12,884 30,000 General Journal Magic Photos 01/01/10 Leased Asset 30,000 Lease liability 30,000 31/12/10 Lease Liability 5,921 Interest expense 4,800 Cash at bank 10,721 Periodic rental payment as per schedule of lease payments 31/12/10 Amortisation Expense 5,000 Accumulated Amortisation 5,000 Amortisation charge to write off leased asset over 6 years on a straight line basis /12/10 Profit and Loss account 9,800 Interest Expense 4,800 Amortisation Expense 5,000 Closing accounts to the profit and loss Magic Photos Statement of Financial Position ( extract ) as at 31 December 2010 Equipment under lease 30,000 Less Accumulated Amortisation 5,000 25,000 Current liabilities Lease liabilities 2 6,869 6,869 Non-current liabilities Lease liabilities 2 17,210 17,210 s to and forming part of the financial statements 1 Operating Profit Operating profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases $ 4,800 Amortisation - equipment under Finance Leases $ 5,000 2 Lease Commitments Total commitments in relation to finance leases are payable as follows: Not later than one year 10,721 Later than one year not later than five years 21,442 Minimum payments 32,163 Less unexpired charges 8,084 Total lease liability 24,

4 Chapter 6: Leases - Solutions 9. Present value = 50,039 50,039 = 12,000 + (12,000 x PVIFA i,4 ) PVIFA i,4 = i = 10% Period ended Minimum Lease Payment Interest Principal 01/01/10 12,000-12,000 38,039 31/12/10 12,000 3,804 8,196 29,843 31/12/11 12,000 2,984 9,016 20,827 31/12/12 12,000 2,083 9,917 10,910 31/12/13 12,000 1,090 10, ,000 9,961 50,039 ( a ) Moonriver Ltd General Journal 01/01/10 Leased Asset 50,039 Lease Liability 50,039 Lease Liability 12,000 Cash at Bank 12,000 Lease payment at 1/1 31/12/10 Lease Liability 8,196 Interest Expense 3,804 Cash at Bank 12,000 Lease payment at 31/12 Amortisation Expense 10,008 Accumulated Amortisation 10,008 Amortisation charge $50,039 x 20% Profit & Loss 13,812 Interest Expense 3,804 Amortisation Expense 10,008 Closing expense accounts to profit and loss ( b ) Non-Current Assets Photocopiers under Lease 50,039 Less Accumulated Amortisation 10,008 40,031 Current Liabilities Lease Liability 2 9,016 9,016 Non-Current Liability 20,827 Lease Liability 2 20,827 s to and forming part of the Financial Statements. 1 - Operating Profit Operating profit is arrived at after charging the following specific items:- Finance charges relating to Finance Leases $ 3,804 Amortisation - equipment under Finance Leases $10, Lease Commitments Total commitments in relation to Finance Leases are payable as follows: Not later than one year $12,000 Later than one year but not later than five years $24,000 Minimum payments $36,000 Less unexpired charges $ 6,157 Total Lease Liability $29,

5 10. This is a three year lease with four payments. The first payment begins on 1 July Present Value of minimum lease payments: PV =10,000 + (10,000 x ) = 34,869 Schedule of Lease Payments Period ended Lease Payment 10% Principal ,869 01/07/09 10,000-10,000 24,869 30/06/10 10,000 2,487 7,513 17,355 30/06/11 10,000 1,736 8,264 9,091 30/06/12 10, , ,000 5,132 34,868 ( a ) Mr Jones General Journal 01/07/09 Leased Asset 34,869 Lease liability 34,869 Initial entry to record lease asset and liability Lease liability 10,000 Initial lease payment 30/06/10 Lease liability 7,513 Interest expense 2,487 Lease payment per schedule Amortisation expense 11,623 Accumulated Amortisation 11,623 Amortisation charged on a straight line basis over 3 years Profit and Loss 14,110 Interest expense 2,487 Amortisation 11,623 Closing expense accounts to profit and loss 30/06/11 Lease liability 8,264 Interest expense 1,736 Lease Payment per schedule Amortisation expense 11,623 Accumulated Amortisation 11,623 Amortisation charged on straight line basis over 3 years Profit and Loss 13,359 Interest expense 1,736 Amortisation 11,623 Closing expense accounts profit and loss 30/06/12 Lease liability 9,092 Interest expense 908 Lease payments per schedule Amortisation expense 11,623 Accumulated Amortisation 11,623 Amortisation charged on straight line basis over 3 years Profit and Loss 12,531 Interest expense 908 Amortisation expense 11,623 Closing expense accounts to profit and loss ( b ) Mr Jones Statement of Financial Position ( extract ) as at 30 June 2010 Non-Current assets Equipment under lease 34,869 less Accumulated Amortisation 11,623 23,246 Current liabilities Lease liability 8,264 8,264 Non-current liability Lease liability 9,092 9,092

6 11. XYZ Building company Schedule of Lease Payments Period ended Lease Payment Interest Principal 129 Chapter 6: Leases - Solutions 01/7/09 12,000-12,000 43,000 30/6/10 12,000 6,450 5,550 37,450 30/6/11 12,000 5,618 6,382 31,068 30/6/12 12,000 4,660 7,340 23,728 30/6/13 12,000 3,559 8,441 15,287 30/6/14 17,580 2,293 15, ,580 22,580 55,000 ( a ) XYZ Building Company - General Journal 01/7/09 Leased Asset 55,000 Lease liability 55,000 Lease liability 12,000 Cash at bank 12,000 30/6/10 Lease liability 5,550 Interest expense 6,450 Cash at Bank 12,000 Entry to record second lease payment Amortisation expense 7,214 Accumulated Amortisation 7,214 Being amortisation calculated on a straight line basis over 7 years. (55,000-4,500)/7 ( b ) XYZ Building Company Statement of Financial Position ( extract ) as at 30 June 2010 Equipment under lease 55,000 Less accumulated amortisation 7,214 47,786 Current Liabilities Lease liability 2 6,382 6,382 Non-current Liabilities Lease Liability 2 31,068 31,068 s to and forming part of the financial statements. 1 Operating Profit Operating profit is arrived at after charging the following specific items:- Finance charges relating to Finance Leases $ 6,450 Amortisation - equipment under Finance Leases $ 7,214 2 Lease Commitments Total commitments in relation to finance leases are payable as follows: Not later than one year 12,000 Later than one year, not later than five years 41,580 Minimum Payments 53,580 Less unexpired finance charges 16,130 Total lease liability 37,450

7 12. Dandar Ltd. Schedule of Lease Payments Period Ended Minimum Lease Payment Interest Principal 01/01/10 18,000-18,000 51,390 31/12/10 18,000 7,708 10,292 41,098 31/12/11 18,000 6,165 11,835 29,263 31/12/12 18,000 4,389 13,611 15,652 31/12/13 18,000 2,348 15, ,000 20,610 69,390 ( a ) 01/01/10 Leased Asset 69,390 Lease liability 69,390 Lease liability 18,000 Cash at bank 18,000 31/12/10 Lease Liability 10,292 Interest expense 7,708 Cash at bank 18,000 Periodic rental payment as per schedule of lease payments Amortisation expense 13,878 Accumulated Amortisation 13,878 Being amortisation calculated on a straight line basis over 5 years. (69,390-0)/5 ( b ) Statement of Financial Position ( extract ) as at 31 December 2010 Equipment under lease 69,390 Less Accumulated Amortisation 13,878 55,512 Current liabilities Lease liabilities 2 11,835 11,835 Non-current liabilities Lease liabilities 2 29,263 29,263 s to and forming part of the financial statements 1 Operating Profit Operating Profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases 7,708 Amortisation - equipment under Finance Leases 13,878 2 Lease Commitments Total commitments in relation to Finance Leases are payable as follows: Not later than one year 18,000 Later than one year not later than five years 36,000 Minimum payments 54,000 Less unexpired charges 12,902 Total lease liability $ 41,

8 Chapter 6: Leases - Solutions 13. Schedule of Lease Payments Date Lease Payment Interest Principal 01/7/09 $29,545 $10,000 $10,000 $19,545 30/6/10 $10,000 $2,932 $ 7,068 $12,477 30/6/11 $10,000 $1,872 $ 8,128 $ 4,347 30/6/12 $ 5,000 $ 653 $ 4, ( a ) 01/7/09 Leased Asset 29,545 Lease liability 29,545 Lease liability 10,000 30/6/10 Lease Liability 7,068 Interest expense 2,932 Periodic rental payment as per schedule of lease payments Amortisation expense 5,909 Accumulated Amortisation 5,909 Being amortisation calculated on a straight line basis over 5 years. (29,545-0)/5 ( b ) Statement of Financial Position ( extract ) as at 30 June 2010 Equipment under lease 29,545 Less Accumulated Amortisation 5,909 23,636 Current liabilities Lease liabilities 2 8,128 8,128 Non-current liabilities Lease liabilities 2 4,349 4,349 s to and forming part of the financial statements 1 Operating Profit Operating Profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases 2,932 Amortisation - equipment under Finance Leases 5,909 2 Lease Commitments Total commitments in relation to Finance Leases are payable as follows: Not later than one year 10,000 Later than one year not later than five years 5,000 Minimum payments 15,000 Less unexpired charges 2,523 Total lease liability $ 12,

9 14. Schedule of Lease Payments Period Ended Minimum Interest Principal 15% 31/12/09 5, ,000 25,000 31/12/10 5,000 3,750 1,250 23,750 31/12/11 5,000 3,562 1,438 22,312 31/12/12 5,000 3,347 1,653 20,659 31/12/13 5,000 3,099 1,901 18,758 31/12/14 5,000 2,814 2,186 16,572 31/12/15 5,000 2,486 2,514 14,058 31/12/16 5,000 2,109 2,891 11,167 31/12/17 12,841 1,674 11, ,841 22,841 30,000 0 ( a ) Waterfall Ltd. General Journal 31/12/09 Leased Asset 30,000 Lease liability 30,000 Lease liability 5,000 Cash at bank 5,000 31/12/10 Lease liability 1,250 Interest expense 3,750 Cash at Bank 5,000 Entry to record second lease payment 31/12/10 Amortisation expense 2,143 Accumulated amortisation 2,143 Being amortisation calculated on a straight line basis over 14 years. ( b ) Waterfall Ltd. Statement of Financial Position (extract) as at 31 December 2010 Equipment under lease 30,000 Less Accumulated Amortisation 2,143 27,857 Current Liabilities Lease liability 2 1,438 1,438 Non-current Liabilities Lease Liability 2 22,312 22,312 s to and forming part of the financial statements. 1 Operating Profit Operating Profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases 3,750 Amortisation - equipment under Finance Leases 2,143 2 Lease Commitments Total commitments in relation to finance leases are payable as follows: Not later than one year 5,000 Later than one year, not later than five years 20,000 Later than five years 17,841 Minium payments 42,841 Less unexpired charges 19,091 Total lease liability $ 23,

10 Chapter 6: Leases - Solutions 15. Schedule of Lease Payments Period ended Lease Payment Interest Principal 01/7/09 55,271 01/7/09 10,500-10,500 44,771 30/6/10 10,500 4,477 6,023 38,748 30/6/11 10,500 3,875 6,625 32,123 30/6/12 10,500 3,212 7,288 24,835 30/6/13 10,500 2,483 8,017 16,818 30/6/14 18,500 1,682 16, ,000 15,729 55,271 ( a ) General Journal Imation Company 01/7/09 Leased Asset 55,271 Lease liability 55,271 Lease liability 10,500 Cash at bank 10,500 30/6/10 Lease liability 6,023 Interest expense 4,477 Cash at Bank 10,500 Entry to record second lease payment Amortisation expense 7,200 Accumulated amortisation 7,200 Being amortisation calculated on a straight line basis over 7 years (55,271 4,871)/7. ( b ) Imation Company Statement of Financial Position ( extract ) as at 30 June 2010 Non-Current Assets Equipment under lease $55,271 Less accumulated amortisation 7,200 48,071 Current Liabilities Lease liability 2 6,625 6,625 Non-Current Liabilities Lease Liability 2 32,123 32,123 s to and forming part of the financial statements. 1 Operating Profit Operating Profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases 4,477 Amortisation - equipment under Finance Leases 7,200 2 Lease Commitments Total commitments in relation to finance leases are payable as follows: Not later than one year 10,500 Later than one year, not later than five years 39,500 Minimum Payment 50,000 Less unexpired finance charges 11,252 Total lease liability 38,

11 16. Schedule of Lease Payments Date Lease Payment 15% Principal 01/07/ ,000 01/07/ ,000 24,000 86,000 30/06/ ,000 12,900 11,100 74,900 30/06/ ,000 11,235 12,765 62,135 30/06/ ,000 9,320 14,680 47,455 30/06/ ,000 7,118 16,882 30,573 30/06/ ,000 4,587 19,413 11,160 11,160 11, ,160 45, ,000 0 ( a ) A.B.C. Manufacturing General Journal Debit Credit 01/07/2009 Leased Asset 110,000 Lease liability 110,000 Lease liability 24,000 Cash at bank 24,000 30/06/2010 Lease liability 11,100 Interest expense 12,900 Cash at Bank 24,000 Entry to record second lease payment Amortisation expense 12,500 Accumulated amortisation 12,500 Being amortisation calculated on a straight line basis over 8 years (110,000-10,000)/8 ( b ) A.B.C. Manufacturing Statement of Financial Position ( extract ) as at 30 June 2010 Equipment under lease 110,000 Less accumulated amortisation 12,500 97,500 Current Liabilities Lease liability 2 12,765 12,765 Non-current Liabilities Lease Liability 2 62,135 62,135 s to and forming part of the financial statements. 1 Operating Profit Operating Profit is arrived at after charging the following specific items: Finance charges relating to Finance Leases 12,900 Amortisation - equipment under Finance Leases 12,500 2 Lease Commitments Total commitments in relation to finance leases are payable as follows: Not later than one year 24,000 Later than one year, not later than five years 83,160 Minimum Payment 107,160 Less unexpired charges 32,260 Total lease liability $ 74,

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