On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to lease a specialized, state-of-the-art photocopier. The following information relates to the lease contract.
The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000.
The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 years
At the end of the lease term, the photocopier must be returned to the Boss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation (when applicable)
The lease agreement requires annual rental payments beginning January 1 2013
Boss Limited desires a 5% rate of return which is known to MR. MR Stationery’s incremental borrowing rate is 7%.
Requirements: (Assume the financial year ends on December 31)
Discuss the nature of the lease for the lessee using the 5 tests criteria (25 marks)
Prepare the lease schedule for the lessee (19 marks)
Prepare the necessary journal entries for January 1 2013 and Dec 31 2013 (7 marks)
SHOW ALL WORKINGS
