taliatalie42
contestada

On 1 st January 2017, Somerset Plc. a manufacturing company, leased a packaging equipment from Prowler Engineers, a company that specialises in making customized industrial machinery. The terms of the lease agreement provided the following: ● Somerset Plc. was to pay annual lease rentals of £200,000 at the beginning of every year under the lease period ● The implicit interest was 10% p.a. ● A residual value of £40,000 was unguaranteed ● The lease period was for 5 years which was equivalent to the economic life of the packaging equipment ● Depreciation was to be computed using the reducing balance method, at the rate of 25% p.a ● Interest over the lease period was to be spread using the sum-of-digits method At the time of entering into the lease agreement, Somerset Plc. had established that the incremental borrowing rate would be 12% p.a. Required a. Prepare journal entries to record the transactions that occur in each of the 5 years of the lease agreement b. Prepare extracts of the Statement of Profit or Loss and the Statement of Financial Position for each of the 5 years of the lease agreement.

Respuesta :

anthougo

The Journal Entries and the Extracts of the Statement of Profit or Loss and Statement of Financial Position to record the transactions in the accounts of Somerset Plc in each year of the asset's lease period are as follows:

a. Journal Entries:

Year 1:

January: Debit Right of Use Asset £833,973

Credit Lease Liability £833,973

December 31: Debit Depreciation Expense £208,493

Credit Accumulated Depreciation £208,493

December 31: Debit Interest Expense £55,342

Debit Lease Liability £144,658

Credit Cash £200,000

December 31, Year 2:

Debit Depreciation Expense £156,370

Credit Accumulated Depreciation £156,370

Debit Interest Expense £44,274

Debit Lease Liability £155,726

Credit Cash £200,000

December 31, Year 3:

Debit Depreciation Expense £117,277

Credit Accumulated Depreciation £117,277

Debit Interest Expense £33,205

Debit Lease Liability £166,795

Credit Cash £200,000

December 31, Year 4:

Debit Depreciation Expense £87,956

Credit Accumulated Depreciation £87,956

Debit Interest Expense £22,137

Debit  Lease Liability £177,863

Credit Cash £200,000

December 31, Year 5:

Debit Depreciation Expense £65,967

Credit Accumulated Depreciation £65,967

Debit Interest Expense £11,069

Debit Lease Liability £188,931

Credit Cash £200,000

b. Extracts of the Statement of Profit or Loss

Year 1:

Depreciation Expense £208,493

Interest Expense £55,342

Year 2:

Depreciation Expense £156,370

Interest Expense £44,274

Year 3:

Depreciation Expense £117,277

Interest Expense £33,205

Year 4:

Depreciation Expense £87,956

Interest Expense £22,137

Year 5:

Depreciation Expense £65,967

Interest Expense £11,069

c. Statement of Financial Position

Year 1:

ROU Asset £833,973

Accumulated Depreciation £208,493

Lease Liability £689,315

Year 2:

ROU Asset £833,973

Accumulated Depreciation £364,863

Lease Liability £533,589

Year 3:

ROU Asset £833,973

Accumulated Depreciation £482,140

Lease Liability £366,794

Year 4:

ROU Asset £833,973

Accumulated Depreciation £570,096

Lease Liability £188,931

Year 5:

ROU Asset £833,973

Accumulated Depreciation £636,063

Lease Liability £0

Data and Calculations:

Annual lease rentals = £200,000

Implicit interest rate = 10%

Unguaranteed residual value = £40,000

Lease period = 5 years

Depreciation rate using reducing balance method = 25%

Interest expense spreading = sum-of-digits method

Established incremental borrowing rate = 12%

Present value of lease payments = £833,973

Sum of all periodic payments = £1,000,000.00 (£200,000 x 5)

Total Interest Expense = £166,027

Depreciation Expense:

(Using the reducing balance method)   Reduced Balance

Year 1 = £208,493 (£833,973 x 25%)           £625,480

Year 2 = £156,370 (£625,480 x 25%)           £469,100

Year 3 = £117,277 (£469,100 x 25%)             £351,823

Year 4 = £87,956 (£351,823 x 25%)            £263,867

Year 5 = £65,967 (£263,867 x 25%)            £197,900

Interest Expense:

(Using the sum-of-digits method)

Year 1 = £55,342 (£166,027 x 5/15)

Year 2 = £44,274 (£166,027 x 4/15)

Year 3 = £33,205 (£166,027 x 3/15)

Year 4 = £22,137 (£166,027 x 2/15)

Year 5 =£11,069 (£166,027 x 1/15)

Transactions Analysis:

Year 1:

January: Right of Use Asset £833,973 Lease Liability £833,973

December 31: Depreciation Expense £208,493 Accumulated Depreciation £208,493

December 31: Interest Expense £55,342 Lease Liability £144,658 Cash £200,000

December 31, Year 2:

Depreciation Expense £156,370 Accumulated Depreciation £156,370

Interest Expense £44,274 Lease Liability £155,726 Cash £200,000

December 31, Year 3:

Depreciation Expense £117,277 Accumulated Depreciation £117,277

Interest Expense £33,205 Lease Liability £166,795 Cash £200,000

December 31, Year 4:

Depreciation Expense £87,956 Accumulated Depreciation £87,956

Interest Expense £22,137 Lease Liability £177,863 Cash £200,000

December 31, Year 5:

Depreciation Expense £65,967 Accumulated Depreciation £65,967

Interest Expense £11,069 Lease Liability £188,931 Cash £200,000

Learn more about recording lease rentals by the lessee here: https://brainly.com/question/14160106

Otras preguntas