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Financial Accounting II

Topic 4 Answers to Tutorial Questions Answers are based on those found in the solutions manual prepared by Hong Nee Ang to accompany Loftus, Leo, Daniliuc, Boys, Luke, Ang and Byrnes (2020) Financial reporting 3rd Edition John Wiley & Sons Australia, Ltd 2020 Leases Question 2 On 30 June 20X1 Black Ltd signed a contract to lease a vehicle from Beauty Ltd. On the day the lease contract was signed, Beauty Ltd purchased the vehicle for $38 ,960. Black Ltd incurred $1,178 in initial costs to obtain the lease. The lease agreement contained the following provisions. Lease Term Annual rental payments (commencing 30 June 20X1)

3 years $11,200

Residual value guarantee Amount of the residual value guarantee that is expected to be payable by the lessee at the end of the lease term

$12,000

Interest rate implicit in the lease

$2,000 5%

The expected useful life of the vehicle is 5 years. The residual value at the end of its expected useful life is nil. At the end of the 3-year lease term, the car was returned to Beauty Ltd, who sold it for $10 ,000. The annual rental payments include an amount of $1,200 to cover the cost of maintenance and repairs that were arranged and paid for by Beauty Ltd. Required 1. Prepare the journal entries for Black Ltd from 30 June 20X1 to 30 June 20X4. 2. Assuming that the lease is a finance lease from the perspective of Beauty Ltd, prepare the journal entries for Beauty Ltd from 30 June 20X1 to 30 June 20X4. 3. Assuming that the lease is an operating lease from the perspective of Beauty Ltd, prepare the journal entries for Beauty Ltd from 30 June 20X1 to 30 June 20X4.

1. Prepare the journal entries for Black Ltd from 30 June 20X1 to 30 June 20X4. BLACK LTD – BEAUTY LTD $10,000 payable on commencement of lease $10,000 x 1.8594 (annuity for 2 years at 5%) $2,000 x 0.8638 (PV of guaranteed residual payable in 3 years at 5%) Total

= = = =

$10,000 $18,594 $1,728 $30,322

Black Ltd Lease Payments Schedule Date 30 June 20X1 30 June 20X2 30 June 20X3 30 June 20X4

Lease Payments

Interest Expense (5%)

Reduction in Liability

$10,000 $10,000 $2,000 $22,000

1,016 567 95 $1,678

8,984 9,433 1,905 $20,322

Balance of Liability 20,322 11,338 1,905 -

Black Ltd Journal entries 30 June 20X1 Right-of-use vehicle Dr Lease liability Cr Cash Cr (Recognition of lease asset and liability) Prepaid executory costs Cash (Non-lease payment)

31,500 20,322 11,178

Dr Cr

1,200

Dr Cr

1,200

Dr Dr Dr Cr

8,984 1,016 1,200

1,200

1 July 20X1 Executory costs expense Prepaid executory costs (Executory costs for the 20X1-X2 year)

1,200

30 June 20X2 Lease liability Interest expense Prepaid executory costs Cash (2nd lease payment)

Depreciation expense Dr Accumulated depreciation Cr (Depreciation of the leased asset = 31,500/3)

11,200 10,500 10,500

1 July 20X2 Executory costs expense Prepaid executory costs (Executory costs for 20X2-X3 period)

Dr Cr

1,200 1,200

2

30 June 20X3 Lease liability Interest expense Prepaid executory costs Cash (3rd lease payment)

Dr Dr Dr Cr

9,433 567 1,200

Depreciation expense Accumulated depreciation (Depreciation of leased asset)

Dr Cr

10,500

Dr Cr

1,200

Depreciation expense Accumulated depreciation

Dr Cr

10,500

Accumulated depreciation Right of use asset (Return of asset to lessor)

Dr Cr

31,500

11,200

10,500

1 July 20X3 Executory costs expense Prepaid executory costs (Executory costs for the 20X3-X4 year)

1,200

30 June 20X4 10,500 31,500

Lease liability Dr 1,905 Interest expense Dr 95 Cash Cr 2,000 (Amount payable by lessee to lessor under residual value guarantee)

3

2. Assuming that the lease is a finance lease from the perspective of Beauty Ltd, prepare the journal entries for Beauty Ltd from 30 June 20X1 to 30 June 20X4. Amount receivable from the lessee $10,000 payable on commencement of lease $10,000 x 1.8594 (annuity for 2 years at 5%) $2,000 x 0.8638 (PV of guaranteed residual payable in 3 years at 5%) Total

= = = =

$10,000 $18,594 $1,728 $30,322

Amount guaranteed by lessee but receivable by lessor from other entities $10,000 x 0.8638 (PV of total residual value guarantee) = $8,638 Total amount receivable by lessor = $38,960 Beauty Ltd Lease Receipts Schedule Date 30 June 20X1 30 June 20X1 30 June 20X2 30 June 20X3 30 June 20X4

Lease Receipts

Interest Revenue (5%)

Reduction in Receivable

$10,000 $10,000 $10,000 $12,000 42,000

1,448 1,020 572 3,040

10,000 8,552 8,980 11,428 38,960

Balance of Receivable 38,960 28,960 20,408 11,428 -

Beauty Ltd (Lessor) Journal entries 30 June 20X1 Motor vehicle Cash (Purchase of motor vehicle)

Dr Cr

38,960

Lease receivable Motor vehicle (Recognition of lease receivable)

Dr Cr

38,960

Cash

Dr Cr

11,200

Lease receivable Executory costs reimbursement in advance (liability)

38,960

38,960

10,000

Cr

1,200

(1st lease receipt) 1 July 20X1 Executory costs reimbursement in advance (liability) Dr 1,200 Executory costs revenue Cr (Executory costs reimbursement for the 20X1-X2 year)

1,200

30 June 20X2 Cash Lease receivable Interest revenue Executory costs reimbursement in advance (liability)

Dr Cr Cr Cr

11,200 8,552 1,448 1,200

4

(2nd lease receipt) Maintenance and repairs expense Cash (Executory costs for the 20X1-X2 year)

Dr Cr

1,200 1,200

1 July 20X2 Executory costs reimbursement in advance Dr 1,200 Executory costs revenue Cr (Executory costs reimbursement for 20X2-X3 period)

1,200

30 June 20X3 Maintenance and repairs expense Dr Cash Cr (Executory costs for the 20X2-X3 year) Cash Lease receivable Interest revenue Executory costs reimbursement in advance (3nd lease receipt)

Dr Cr Cr

1 200 1 200 11 200 8 980 1 020

Cr

1 200

1 July 20X3 Executory costs reimbursement in advance Dr 1,200 Executory costs revenue Cr (Executory costs reimbursement for the 20X3-X4 year)

1 200

30 June 20X4 Maintenance and repairs expense Dr Cash Cr (Executory costs for the 20X3-X4 year)

1,200 1,200

Motor vehicle Cash Lease receivable Interest revenue (Return of vehicle to lessor)

Dr Dr Cr Cr

10,000 2,000

Cash

Dr Cr

10,000

Motor vehicle (Sale of vehicle)

11,428 572

10,000

5

3. Assuming that the lease is an operating lease from the perspective of Beauty Ltd, prepare the journal entries for Beauty Ltd from 30 June 20X1 to 30 June 20X4. Beauty Ltd (Lessor) Journal entries 30 June 20X1 Motor vehicle Cash (Purchase of motor vehicle)

Dr Cr

38,960

Dr Lease income received in advanceCr Executory costs reimbursement in advance (Liab) Cr (First lease payment received)

11,200

Cash

38,960

10,000 1,200

1 July 20X1 Executory costs reimbursement in advance Dr 1,200 Reimbursement revenue Cr (Executory costs reimbursement revenue for the 20X1-X2 year) Lease income received in advance Lease income (Lease income for the 20X1-X2 year)

Dr Cr

10,000

Dr Lease income received in advance Cr Executory costs reimbursement in advance Cr (2nd lease receipt)

11,200

Maintenance and repairs expense Dr Cash Cr (Executory costs for the 20X1-X2 year)

1,200

Depreciation expense Dr Accumulated depreciation Cr (Depreciation of the motor vehicle - 1/5 x $38,960)

7,792

1,200

10,000

30 June 20X2 Cash

10,000 1,200

1,200

7,792

1 July 20X2 Executory costs reimbursement in advance Dr 1,200 Reimbursement revenue Cr (Executory costs reimbursement for 20X2-X3 year) Lease income received in advance Lease income (Lease income for the 20X2-X3 year)

Dr Cr

1,200

10,000 10,000

6

30 June 20X3 Cash

Dr Lease income received in advance Cr Executory costs reimbursement in advance Cr

11,200

Maintenance and repairs expense Dr Cash Cr (Executory costs for the 20X2-X3 year)

1,200

Depreciation expense Dr Accumulated depreciation Cr (Depreciation of the motor vehicle - 1/5 x $38,960)

7,792

10,000 1,200 1,200

7,792

1 July 20X3 Executory costs reimbursement in advance Dr 1,200 Reimbursement revenue Cr (Executory costs reimbursement for 20X3-X4 year) Lease income received in advance Lease income (Lease income for the 20X3-X4 year)

Dr Cr

10,000

Maintenance and repairs expense Dr Cash Cr (Executory costs for the 20X3-X4 year)

1,200

Depreciation expense Dr Accumulated depreciation Cr (Depreciation of the motor vehicle - 1/5 x $38,960)

7,792

1,200

10,000

30 June 20X4 1,200

7,792

Loss of sale of motor vehicle Cash Accumulated depreciation Motor vehicle (Sale of vehicle)

Dr Dr Dr Cr

5,584 10,000 23,376

Cash

Dr Cr

2,000

Other income (Payment received under guarantee)

38,960

2,000

7

Appendix A

Present value of an annuity of $1 discounted at i% per period for n periods n 1

1% 0.9901

2% 0.9804

3% 0.9709

4% 0.9615

5% 0.9524

6% 0.9434

7% 0.9346

8% 0.9259

9% 0.9174

10% 0.9091

12% 0.8929

2 3 4 5

1.9704 2.9410 3.9020 4.8534

1.9416 2.8839 3.8077 4.7135

1.9135 2.8286 3.7171 4.5797

1.8861 2.7751 3.6299 4.4518

1.8594 2.7232 3.5460 4.3295

1.8334 2.6730 3.4651 4.2124

1.8080 2.6243 3.3872 4.1002

1.7833 2.5771 3.3121 3.9927

1.7591 2.5313 3.2397 3.8897

1.7355 2.4869 3.1699 3.7908

1.6901 2.4018 3.0373 3.6048

6 7 8 9

5.7955 6.7282 7.6517 8.5660

5.6014 6.4720 7.3255 8.1622

5.4172 6.2303 7.0197 7.7861

5.2421 6.0021 6.7327 7.4353

5.0757 5.7864 6.4632 7.1078

4.9173 5.5824 6.2098 6.8017

4.7665 5.3893 5.9713 6.5152

4.6229 5.2064 5.7466 6.2469

4.4859 5.0330 5.5348 5.9952

4.3553 4.8684 5.3349 5.7590

4.1114 4.5638 4.9676 5.3282

10 11 12 13

9.4713 10.3676 11.2551 12.1337

8.9826 9.7868 10.5753 11.3484

8.5302 9.2526 9.9540 10.6350

8.1109 8.7605 9.3851 9.9856

7.7217 8.3064 8.8633 9.3936

7.3601 7.8869 8.3838 8.8527

7.0236 7.4987 7.9427 8.3577

6.7101 7.1390 7.5361 7.9038

6.4177 6.8052 7.1607 7.4869

6.1446 6.4951 6.8137 7.1034

5.6502 5.9377 6.1944 6.4235

14 15

13.0037 13.8651

12.1062 12.8493

11.2961 11.9379

10.5631 11.1184

9.8986 10.3797

9.2950 9.7122

8.7455 9.1079

8.2442 8.5595

7.7862 8.0607

7.3667 7.6061

6.6282 6.8109

n

1%

3%

4%

10%

12%

1 2 3 4

0.9901 0.9803 0.9706 0.9610

0.9804 0.9612 0.9423 0.9238

0.9709 0.9426 0.9151 0.8885

0.9615 0.9246 0.8890 0.8548

0.9524 0.9070 0.8638 0.8227

0.9434 0.8900 0.8396 0.7921

0.9346 0.8734 0.8163 0.7629

0.9259 0.8573 0.7938 0.7350

0.9174 0.8417 0.7722 0.7084

0.9091 0.8264 0.7513 0.6830

0.8929 0.7972 0.7118 0.6355

5 6 7 8

0.9515 0.9420 0.9327 0.9235

0.9057 0.8880 0.8706 0.8535

0.8626 0.8375 0.8131 0.7894

0.8219 0.7903 0.7599 0.7307

0.7835 0.7462 0.7107 0.6768

0.7473 0.7050 0.6651 0.6274

0.7130 0.6663 0.6227 0.5820

0.6806 0.6302 0.5835 0.5403

0.6499 0.5963 0.5470 0.5019

0.6209 0.5645 0.5132 0.4665

0.5674 0.5066 0.4523 0.4039

9 10 11 12

0.9143 0.9053 0.8963 0.8874

0.8368 0.8203 0.8043 0.7885

0.7664 0.7441 0.7224 0.7014

0.7026 0.6756 0.6496 0.6246

0.6446 0.6139 0.5847 0.5568

0.5919 0.5584 0.5268 0.4970

0.5439 0.5083 0.4751 0.4440

0.5002 0.4632 0.4289 0.3971

0.4604 0.4224 0.3875 0.3555

0.4241 0.3855 0.3505 0.3186

0.3606 0.3220 0.2875 0.2567

13 14

0.8787 0.8700

0.7730 0.7579

0.6810 0.6611

0.6006 0.5775

0.5303 0.5051

0.4688 0.4423

0.4150 0.3878

0.3677 0.3405

0.3262 0.2992

0.2897 0.2633

0.2292 0.2046

15

0.8613

0.7430

0.6419

0.5553

0.4810

0.4173

0.3624

0.3152

0.2745

0.2394

0.1827

Present value of $1 discounted at i% per period for n periods 2%

5%

6%

7%

8%

9%

8...