Reference no: EM132549892

On 1 July 2016, Pyrmont Ltd entered into a five-year lease agreement with Fast Finance Ltd for an item of machinery. The lease agreement requires Pyrmont Ltd to make five annual lease payments of $10,000 per year paid at the beginning of each year (in advance: annuity due) on 1 July with the first payment on 1 July 2016.

At the end of the lease term, Pyrmont Ltd will return the item of machinery to Fast Finance Ltd. The item of machinery will then be sold by Fast Finance Ltd. The residual value of the item of machinery at the end of the lease term is determined by Fast Finance Ltd to be $5,000 of which $4,000 has been guaranteed by Pyrmont Ltd.

At the commencement of the lease, Pyrmont Ltd estimates that, at the end of the lease term, the item of machinery will realise $8,000 when it is sold. The interest rate implicit in the lease is not determinable by Pyrmont Ltd. Pyrmont Ltd's incremental borrowing rate is 5% per annum which reflects the fixed rate at which Pyrmont Ltd could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a five-year term, and with similar collateral.

Required

Question (a) Determine the amounts at which Pyrmont Ltd would recognise the right-of-use asset and the lease liability on 1 July 2016.

Question (b) Determine the amount of the lease receivable to be recognised by Fast Finance Ltd on 1 July 2016. Assume that Fast Finance Ltd can readily determine the interest rate implicit in the lease which is 7%.

Question (c) Prepare the appropriate journal entries to account for the lease by Pyrmont Ltd between 1 July 2016 and 1 July 2017.

Question (d) On 30 June 2018, Pyrmont Ltd revises its estimate of the amount that the item of machinery is expected to realise when it is sold at the end of the lease term. How would Pyrmont Ltd account for a revised estimate of $3,000? What if the revised estimate was $10,000?