Reference no: EM132599586

Hilltop Hoods Ltd entered into a lease involving machinery on 1 January 2016. The lease had the following characteristics:

1. One initial payment of $100,000 at the date of signing. Three further payments of $100,000 are to be made at the end of 2016, 2017 and 2018. A residual payment of $40,000 is to be made at the end of 2019.
2. Hilltop Hoods Ltd will take ownership of the machinery at the end of 2019. The lease is non-cancellable and the interest rate of the lease is 20% p.a. The machinery is expected to have a five years useful life. The fair value of the machinery at 1 January 2016 was $329,938 and the present value of the minimum lease payments is higher than this fair value.
3. The lease is classified as a finance lease.

Required:

Question (a) Prepare the lease schedule for the four years to 31 December 2019.

Question (b) Provide the journal entries required in the books of Hilltop Hoods Ltd for the year ended 31 December 2016. Show all workings (narrations are not required).

Question (c) Show how the lease would appear in the Statement of Financial Position of Hilltop Hoods as at 31 December 2017 in accordance with AASB101 Presentation of Financial Statements.

Question (d) Hilltop Hoods Ltd is considering diversifying its operations and is evaluating opportunities in the areas of Exploration of Mineral Resources, or Research and Development. They have asked your advice on the following issues:

Briefly explain the accounting treatment required under appropriate Australian Accounting Standards if they spent money exploring for minerals.