Reference no: EM132889376
Squeal Ltd is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered into an agreement on 1 July 2015 to sell its processing plant to Tyres Ltd for $467 100. At the date of sale, the plant had a carrying amount of $400 000 and a future useful life of 5 years. Tyres Ltd immediately leased the processing plant back to Squeal Ltd.
The terms of the lease agreement were:
Lease term 3 years
Economic life of plant 5 years
Annual rental payment, in arrears (commencing 30/6/16) $165 000
Residual value of plant at end of lease term $90 000
Residual value guaranteed by Squeal Ltd $60 000
Interest rate implicit in the lease 6%
The lease is cancellable, but only with the permission of the lessor.
At the end of the lease term, the plant is to be returned to Tyres Ltd. In setting up the lease agreement Tyres Ltd incurred $9414 in legal fees and stamp duty costs. The annual rental payment includes $15 000 to reimburse the lessor for maintenance costs incurred on behalf of the lessee.
Required:
Problem A. Make a lease payments schedule and the journal entries in the records of Squeal Ltd for the lease. Show all workings.
Problem B. Make a lease receipts schedule and the journal entries in the records of Tyres Ltd for the lease. Show all workings.
Problem C. Explain how and why your answer to requirements A, B and C would change if the processing plant had been manufactured by Tyres Ltd at a cost of $400 000.
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