Reference no: EM132440594
On 1 July 2018 Supremes Ltd, entered into a lease contract, to lease equipment from Prime Bank Ltd for seven years.
The lease contract requires Supremes Ltd to make half yearly lease payments of $75,000 for 7 years, commencing on 1 July 2018. Subsequent payments are due on 30 June and 31 December each year. Included within the $75 000 half yearly lease payments, is an amount of $10,000, representing payment to Prime Bank Ltd for the insurance and maintenance of the equipment. The interest rate implicit in the lease contract is 9% per annum, (4.5% per half year). When the lease contract was negotiated, it was estimated that the unguaranteed residual value of the equipment would be $75,216.
The equipment is expected to have a useful life of 10 years, after which time it will have an expected residual value of $25,000. The equipment is to be depreciated on a straight-line basis.
On 1 July 2018, Prime Bank Ltd purchased the equipment for $735,000, which was the current market value of the equipment at the date of purchase. The equipment is expected to have a useful life of 10 years, after which time it will have an expected residual value of $25,000. The equipment is to be depreciated on a straight-line basis.
The table below sets out data on present values:
Number of periods to Maturity Interest Rate Present Value of $1 due at Maturity Present Value of an annuity of $1 until Maturity
6 4.5% 0.767896 5.157872
7 4.5% 0.734828 5.892701
13 4.5% 0.564272 9.682852
14 4.5% 0.539973 10.222825
6 9% 0.596267 4.485919
7 9% 0.547034 5.032953
13 9% 0.326179 7.486904
14 9% 0.299246 7.786150
Required:
a) Prepare the journal entries relating to the lease contract for Supreme Ltd for the financial year ended 30 June 2019, in accordance with AASB 16: Leases. Show all workings necessary to derive your answer.
b) Prepare the journal entries relating to the lease contract for Prime Bank Ltd for the financial year ended 30 June 2019, in accordance with AASB 16: Leases. Show all workings necessary to derive your answer.