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Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired...

Deliveries Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of $180 000. The truck will be painted with Deliveries Ltd's logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $40 000. Deliveries Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:

• Date of entering lease: 1 July 2019

• Duration of lease: four years.

• Life of leased asset: five years, after which it will have no residual value. Lease payments: $ 100,000 at the end of each year.

• Interest rate implicit in the lease: 10 per cent.

• Unguaranteed residual: $50 000.

• Fair value of truck at inception of the lease: $351 140.

REQUIRED

(a) Demonstrate that the interest rate implicit in the lease is 10 per cent.

(b) Prepare the journal entries to account for the lease transaction in the books of the lessor. City Vans Ltd at 1 July 2019 and 30 June 2020.

(c) Prepare the journal entries to account for the lease transaction in the books of the lessee, Deliveries Ltd, at 1 July 2019 and 30 June 2020.

(d) On 30 June 2023 Deliveries Ltd pays the residual of $50 000 and purchases the truck. Prepare all journal entries in the books of Deliveries Ltd for 30 June 2023 in relation to the termination of the lease and the purchase of the truck.

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Lessor a) Demonstrate that the interest rate implicit in the ease is 10 per cent Workings Year Year for discountin Annual Lease Installments paid at the end of the vean PV factor @ 10% Present Value of Min lease payments Lease Recoverable Round off 4 Total 100,000 0.90909 90,909 351,137 351,140 4 100,000 0.68301 68,301 4 50,000 0.68301 34,151 100,000 0.82645 82,645 100,000 0.75131 75,131 351,137 Repayment Schedule Reductiorn in Accounts Lease Annual Payment Year Interest Income Receivable Recoverable 351,140 286,254 214,880 136,368 0 0 1 35,114 28,625 21,488 13,633 98,860 100,000 100,000 100,000 150,000 450,000 351,140 64,886 71,375 78,512 136,367 4 (b) Prepare the journal entries to account for the lease transaction in the books of the lessor. City Vans Ltd at 1 July 2019 and 30 June 2020 Lessor Books General Journal a. To record lease July 1, 2019 Lease Recoverable Cost of Goods Sold Sales Revenue Equipment Debit Credit $ 351,140 $ 180,000 351,140 180,000 June 30, 2020 bl Record the lease Cash Lease Recoverable Interest Revenue ent 100,000 64,886 35,114Lessee Books Payments Required p Fair Value NPV Percentage Since present value of lease Lease term estimated useful life Percentage Since Lease term 75% of economic life of the leased pro 100,000 351,140 316,986 90.3% ear ments exceed 90% To be classified as Capital Lease 80% the same will be classified as Capital Lease Lessee Books Workin Year Year for discountin Annual Lease Installments paid at the end of the year PV factor @10% Present Value of Min lease Value at which to be recorded as asset by lessee is lower of FMV or NPV Depreciation (FV-Salvage value)/4 years 100,000 0.90909 90,909 100,000 0.82645 82,645 100,000100,000 0.68301 68,301 -Unguaranteed residual not considered 0.75131 0.68301 ents 75,131 316,986 316,986 79,247 79,247 79,247 79,247 316,986 Repayment Schedule Reduction in Principal Outstandin Charges Payment Amount g Liability 316,986 316,986 68,301 248,685 75,132 173,553 90,908 Finance Annual Quarter 0 31,699 24,868 17,355 9,092 83,014 100,000 100,000 100,000 100,000 82,645 90,908 400,000 316,986 4c) Prepare the journal entries to account for the lease transaction in the books of the lessee, Deliveries Ltd, at 1 July 2019 and 30 June 2020 Lessee Books General Journal July 1, 2019 a) Capital Lese-in the books of Lessee Lease Equipment Lease payable To record the lease. Debit Credit 316,986 316,986 b) to record depreciation/Amortisation June 30, 2020 Depreciation Expense Accumulated depreciation 79,247 79,247 d) To record lease payment June 30, 2020 31,699 68,301 Cash 100,000 (d) On 30 June 2023 Deliveries Ltd pays the residual of $50 000 and purchases the truck 30 June 2023 Truck Cash $50,000 50,000 Prepare all journal entries in the books of Deliveries Ltd for 30 June 2023 in relation to the termination of the lease and the purchase of the truck. Accumulated Depreciation Lease Equipment 316,986 316,986

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