Due date: 19 October 2009
Value: 10% of total assessment
Question 1
Summer Ltd entered into an agreement on 1 July 2010 to lease a harvester with a fair value of $34 797 from Field Ltd. The lease agreement details are as follows:
Length of lease 5 years
Annual lease payment $8 000
Estimated useful life of harvester 8 years
Estimated residual at end of useful life $2 000
Residual at end of lease term (50% guaranteed) $7 200
Interest rate implicit in the lease 9%
Additional information:
• Lease payments are payable on 30 June each year, with the first payment on 30 June 2011
• The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation.
• Summer Ltd does not intend to purchase the harvester at the end of the lease term.
• Field Ltd incurred costs of $1 000 to negotiate and execute the lease agreement.
• Field Ltd purchased the harvester for $34 797 just before the inception of the lease.
Required
• State how both companies should classify the lease. Give reasons for your answer.
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• Prepare a schedule of lease payments for Summer Ltd.
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• Prepare a schedule of lease payments for Field Ltd.
• Prepare journal entires to record the lease transactions for the year ended 30 June 2011 in the accounts of Summer Ltd.
• Prepare journal entires to record the lease transactions for the year ended 30 June 2011 in the accounts for Field Ltd.
