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On 1 July 2023, Sherlock Ltd leased a processing plant to Holmes Ltd
On 1 July 2023, Sherlock Ltd leased a processing plant to Holmes Ltd. The plant was purchased by Sherlock Ltd on 1 July 2023 for its fair value of $348 942. The lease agreement contained the following provisions:
|
Lease term |
3 years |
|
Economic life of plant |
5 years |
|
Annual rental payment, in arrears (commencing 30/6/24) |
$120 000 |
|
Residual value at end of the lease term |
$50 000 |
|
Residual guaranteed by lessee |
$30 000 |
|
Interest rate implicit in lease |
8% |
|
The lease is cancellable only with the permission of the lessor. |
Holmes Ltd intends to return the processing plant to Sherlock Ltd at the end of the lease term. The lease has been classified as a finance lease by Sherlock Ltd.
Required
- Prepare:
- the lease payments schedule for Holmes Ltd (show all workings)
- the journal entries in the records of Holmes Ltd for the year ended 30 June 2025.
- Prepare:
- the lease receipts schedule for Sherlock Ltd (show all workings)
- the journal entries in the records of Sherlock Ltd for the year ended 30 June 2025.
Expert Solution
Part-1)
PV of LP = [$120 000 * 2.5771 (T2, 8%, 3years)] + [$30 000 * 0.7938 (T1,8%,3yrs)]
= [$309,252 + $23,814]
= $333,066
Lease receipts Interest revenue (8%) Reduction in receivable Balance of liability
01-Jul-23 333,066
30-Jun-24 120,000 26,645 93,355 239,711
30-Jun-25 120,000 19,177 100,823 138,888
30-Jun-26 150,000 11,111 138,888
390,000 56,934 333,066
b)
Date Particulars Debit Credit
30-Jun-25 Lease liability 100,823
Interest expense 19,177
Cash 120,000
(Second lease payment)
Depreciation expense 101,022
Accumulated depreciation
($333,066 – $30,000) / 3 years 101,022
(Depreciation of the leased asset for the year)
Part-2)
a)
Lease receipts Interest revenue (8%) Reduction in receivable Balance of receivable
01-Jul-23 348,942
30-Jun-24 120,000 27,915 92,085 256,857
30-Jun-25 120,000 20,549 99,451 157,406
30-Jun-26 170,000 12,592 157,406
410,000 61,057 348,942
PV of LP = {$120 000 * 2.5771 [T2, 8%, 3yrs]} + {[$30 000 * 0.7938 [T1, 8%, 3yrs]}
= [$309,252 + $23,814]
= $333,066
PV of UGRV = [$20 000 * 0.7938 [T1, 8%, 3yrs] = $15,876
b)
Date Particulars Debit Credit
30-Jun-25 Cash 120,000
Interest expense 20,549
Lease receivable 99,451
(Second lease receipt)
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