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Lease classification and accounting (Leo et al 2009 Question 6.13) On 1 July 2010, Purple Ltd entered into an agreement to lease a bulldozer to Lemon...
[15 marks]Lease classification and accounting(Leo et al 2009 Question 6.13)On 1 July 2010, Purple Ltd entered into an agreement to lease a bulldozer to Lemon Ltd. The leaseagreement contained the following provisions:Lease term 5 yearsEstimated useful life of bulldozer 8 yearsAnnual lease payment, payable on 30 June each year $8,000Fair value of bulldozer at 1 July 2010 $34,747Estimated residual value of bulldozer at end of its useful life $2,000Residual value at the end of the lease term, of which 50% isguaranteed by Lemon Ltd$7,200Interest rate implicit in lease 9%The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable oncancellation. Lemon Ltd does not intend to buy the bulldozer at the end of the lease term.Purple Ltd incurred $1,000 to negotiate and execute the lease agreement. Purple Ltd purchased thebulldozer for $34,797 just before the inception of the lease.Required:(a) State how both companies should classify the lease. Give reasons for your answer.(b) Prepare a schedule of lease payments for Lemon Ltd.(c) Prepare a schedule of lease receipts for Purple Ltd.(d) Prepare journal entries to record the lease transactions for the year ended 30 June 2011 in therecords of both companies.Note: round all figures to the nearest dollar, and leave all percentages with one decimal place.
