Reference no: EM133002763
Problem - Hey Ltd leased a building from There Ltd on 1 July 2020. The building is in the records of There Ltd at its fair value of $535,212 on 1 July 2020. There Ltd incurred $2,500 in costs to prepare and execute the lease document.
The lease agreement contained the following details:
Lease term 10 years
Economic life of the building 15 years
Annual rental payments, in arrears (commencing 30/06/21) $90,000
Residual value of the building at the end of the lease term $40,000
Residual value of the building guaranteed by Hey Ltd $25,000
Interest rate implicit in the lease 10%
PV of $1 in 10 years at 10% 0.3855
PV of $1 annuity at 10% with 9 payments 5.7590
PV of $1 annuity at 10% with 10 payments 6.1446
The annual payments of $90,000 include $5,000 to reimburse There Ltd for maintenance and insurance costs that will need paid by There Ltd.
Hey Ltd incurred $1,650 in costs to negotiate the lease agreement. The building will be returned to There Ltd at the end of the lease term. Hey Ltd and There Ltd have a reporting period ending 30 June.
Required -
1. Prepare the necessary journal entries for the lease arrangement at 30 June 2021 in the records of Hey Ltd.
2. Calculate the lease receivable that There Ltd will recognise on 30 June 2020.
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