Reference no: EM132731142

Questions -

Q1. On 1 July 2019, XYZ Ltd leased a machinery from ABC Ltd to be used to be used in the mining operations. The machinery cost XYZ Ltd $120 307, considered to be its fair value on that same day. The capital/finance lease agreement contained the following provisions:

The lease term is for 3 years, commencing on 1st July 2019

The lease is cancellable and with a 10 % charge of the leased asset's fair value from the lessor

Annual lease payment, payable on 30 June each year $40,000

Estimated useful life of machinery 4 years

Estimated residual value of the machinery at the end of useful life $6,000

Bargain purchase option that La Ltd can exercise at the end of lease term $15,000

Interest rate implicit in the lease 7%

REQUIRED -

1. Calculate the present value of lease payment.

2. Prepare the lease schedules for XYZ Ltd.

3. Prepare the journal entries in the records of XYZ Ltd only for the year ended 30 June 2020.

Q2. XYZ Ltd is a mining company and have been in the industry for last 20 years. Currently, it is concerned about the recent exploration and evaluation activities in a specific area which will cause significant damage to the surrounding environment. The state government of the where the area of interest is located has attached strict conditions to the exploration licence for that area. Those conditions require that XYZ Ltd return the environment to its original condition.

Required - What would be implications of the above situation for XYZ Ltd's financial statements?