Question

Turnbull Ltd has entered into an agreement to lease a machine to Abbott Ltd. Details are: Length of lease 5 years Commencement date 1 July 2013 Annual lease payment, payable 30 June each year commencing 30 June 2014 $8 000 Fair value of the Machinery at 1 July 2013 $34 797 Estimated economic life of the Machinery 8 years Estimated residual value of the Machinery at the end of its economic life $2 000 Residual value at the end of the lease term, which is fully guaranteed by Abbott Ltd $5 662 Interest rate implicit in the lease 9% The lease is not cancellable. Abbott Ltd does not intend to buy the Machinery at the end of the lease term but will return it to Turnbull. Turnbull Ltd purchased the Machinery for $32 000 several months before the inception of the lease, and from Turnbull's viewpoint this is a manufacturingtype lease.

Required a) Use the lease schedule below to calculate the interest expense for the following years: 2014, 2015, 2016, 2017 and 2018?

b)Prepare the journal entry to record the purchase of the machinery in the books of Turnbull Ltd.

c)Prepare the journal entry to record the lease transactions for the year ended 30 June 2014 in the books of Turnbull Ltd.

d)Prepare the journal entry to record the lease transactions for the year ended 30 June 2015 in the books of Abbott Ltd.

e)Prepare the journal entry to record depreciation expense on the leased asset for the year ended 30 June 2015 in the books of Abbott Ltd.

Answer 1

G H к Credit Debit $32,000.00 А в с D a) Year ended Receipts $ Interest $ Principal Reduction $ Balance of Lease $ 01-Jul-13 34797 30-Jun-14 8000 3132 4868 29929 30-Jun-15 8000 2694 5306 24622 30-Jun-16 8000 2216 5784 18838 30-Jun-17 8000 1695 6305 12534 30-Jun-18 8000 1128 6872 5662 40000 b) Machinery Cash (To record purchase of Machinery) $32,000.00 c) Lease receivable Profit or Loss- Finance Income (To recgnize finance income on lease receivable) $ $ 4,868 3,132 $ 8,000.00 Bank Lease receivable (To record receipt of lease amount) $ 2,693.59 d) Profit or Loss- Interest expense Lease Liability (To recognise interest on Lease liability) $ 2,693.59 $ 8,000.00 Lease Liability Bank (To recognize payment of Lease liability) $ 8,000.00 $ 6,959 e) Profit or Loss-Depreciation Charge Right of Use Asset (To record depreciation expense on ROU Asset) $ 6,959

F G JK Debit Credit 32000 A B C 1 a) Year ended Receipts $ 2 41456 41820 8000 42185 8000 42551 8000 42916 8000 43281 8000 =SUM(C3:07) co vouw D Interest $ Principal Reduction $ Balance of Lease $ 34797 =F2*9% =C3-D3 =F2-E3 =F3*9% =C4-D4 =F3-E4 =F4*9% =C5-D5 =F4-E5 =F5*9% =C6-D6 =F5-E6 =F6*9% =C7-D7 =F6-E7 b) Machinery Cash (To record purchase of Machinery) =J3 c) Lease receivable Profit or Loss- Finance Income (To recgnize finance income on lease receivable) =E3 =D3 9 8000 Bank Lease receivable (To record receipt of lease amount) 10 11 12 13 14 15 16 17 18 19 =D4 d) Profit or Loss-Interest expense Lease Liability (To recognise interest on Lease liability) =J15 8000 Lease Liability Bank (To recognize payment of Lease liability) 8000 =F2/5 e) Profit or Loss-Depreciation Charge Right of Use Asset (To record depreciation expense on ROU Asset) 24 25 26 =J23

In case of any explanation, please do comment. Thank you.