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On 1 July 2019, Freeway Fjord Ltd entered into an agreement with Normal Ltd under which Normal Ltd would lease a Fjord Festival motor vehicle...
On 1 July 2019, Freeway Fjord Ltd entered into an agreement with Normal Ltd under which Normal Ltd would lease a Fjord Festival motor vehicle supplied by Freeway Fjord Ltd. Freeway Fjord Ltd is a retailer of brand new Fjord motor vehicles and its list price of a new Fjord Festival is $40,000 "drive away" on 1 July 2019. The cost of a brand new Fjord Festival to Freeway Fjord Ltd is $30,000. The terms of the lease demand that Normal Ltd make an up-front payment of $1,103 on 1 July 2019 followed by five annual payments of $10,000 with the first of $10,000 instalments falling due on 30 June 2020. The lease contains punitive termination clauses that render it non-cancellable and the lease agreement stipulates that legal title in the Fjord Festival will transfer to Normal Ltd when it has made the last lease payment (due on 30 June 2024). Normal Ltd anticipates that on 30 June 2024, the Fjord Festival will have a residual value of zero and will have no remaining useful life. The lease has an implicit interest rate of 9% per annum.
Required: 1. Reconcile the Fjord Festival's fair value with the present value of the lease payments.
2. Construct a schedule that divides each lease payment made by Normal Ltd into its interest component and its reduction in principal. Show how much principle remains outstanding after each payment.
3. What general journal entries would Freeway Fjord Ltd have to make on 1 July 2019?
4. What general journal entries would Normal Ltd have to make on 1 July 2019?
5. Record (in general journal format) the payment received on 30 June 2020 by Freeway Fjord Ltd.
6. What general journal entries would Normal Ltd have to make on 30 July 2023 if it amortised the leased motor vehicle on a straight-line basis.
