12 salesandleaseback 1 classificationofthelease both

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: reciation Dr 33 136 Cr 33 136 Exercise 14.12 Sales and leaseback 1. Classification of the lease Both the lessor and the lessee must determine whether the lease agreement effectively transfers substantially all of the risks and rewards from the owner to the lessee. In this case, based on the following evidence, both parties should conclude that such a transfer is achieved and the lease should be classified as a finance lease: the lease is non‐cancellable (by definition) the lease term at 60% which, arguably, is for a major part of the asset’s economic life, and the PV of the MLP at 96.6% represents substantially all of the asset’s fair value (see calculation below) PV of MLP Minimum Lease Payments = ($165 000 – $15 000) x 3 [rentals net of executory costs] + $60 000 [GRV] Interest Rate 6% Pattern of Payments ‐ Arrears PV of MLP = $150 000 x 2.6730 [T2 6% 3 years] + $60 000 x .8396 [T1 6% 3 years] = $400 950 + $50 376 = $451 326 PV/FV = $451 326/$467 100 + $9 414 = 95% 3 Ultramarine Ltd (Lessee) Date MLP 1 July 2010 30 June 2011 30 June 2012 30 June 2013 $ 2. Lease Payments Schedule Interest Reduction of Expense liability $ $ 150 000 150 000 210 000 510 000 27 080 19 704 11 890 58 674 122 920 130 296 198 110 451 326 Balance of lease liability $ 451 326 328 406 198 110 ‐ ‐ Accounting for the lease in the books of Ultramarine Ltd Journal Entries – Year ended 30 June 2011 2010 1 July 2011 30 June 467 100 67 100 400 000 Leased plant Dr Lease liability Cr (Recognition of lease agreement) 451 326 451 326 Lease liability Interest expense Executory costs expense Cash (First lease payment) Dr Dr Dr Cr 122 920 27 080 15 000 165 000 Depreciation expense Dr Accumulated depreciation Cr (Depreciation of leased asset [($451 326 – 60 000)/3] 130 442 130 442 22 367 22 367 Cash Deferred gain on sale Processing plant (Sale of plant under sale and leaseback agreement) Dr Cr Cr Deferred gain on sale Dr Gain on sale (income) Cr (Amortisation of deferred gain ‐ $67 100/3) 4 3. Accounting for the lease in the books of Wangansi Ltd Date MLR 1 July 2010 30 June 2011 30 June 2012 30 June 2013 $ Wangansi Ltd (Lessor) Lease Receipts Schedule Interest Reduction in Revenue Receivable $ $ 150 000 150 000 240 000 540 000 28 591 21 306 13 589 63 486 121 409 128 694 226 411 476 514 Balance of lease Receivable $ 476 514 355 105 226 411 ‐ ‐ 2010 1 July 2011 30 June Journal Entries – Year ended 30 June 2011 Processin...
View Full Document

Ask a homework question - tutors are online