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On 1 July 20x2, Large Mart signs a seven (7) year lease-(Answered)

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On 1 July 20x2, Large Mart signs a seven (7) year lease contract for a photocopier for its office. At the end of the lease period Large Mart will have the option to purchase the photocopier for $500 (but the expected fair value of the photocopier at the end of the lease term is $1,000). Large Mart is able to cancel the lease contract after paying 85% of the outstanding lease payments as a fine. Large Mart expects that the useful life of the photocopier is eight (8) years and all items in the Machinery/Equipment Account of Large Mart are depreciated using the sums-of-digits method. The photocopier is expected to have a residual value of $50 at the end of its useful life.



On 1 July 20x2, Large Mart signs a seven (7) year lease contract

 

for a photocopier for its office. At the end of the lease period Large

 

Mart will have the option to purchase the photocopier for $500

 

(but the expected fair value of the photocopier at the end of the

 

lease term is $1,000). Large Mart is able to cancel the lease

 

contract after paying 85% of the outstanding lease payments as a

 

fine. Large Mart expects that the useful life of the photocopier is

 

eight (8) years and all items in the Machinery/Equipment Account

 

of Large Mart are depreciated using the sums-of-digits method.

 

The photocopier is expected to have a residual value of $50 at the

 

end of its useful life.

 

The lease contract requires Large Mart to make the following

 

payments: $10,000 when the contract is signed (1 July 20x2), and

 

$1,000 at the end of each year (30 June) during the lease term. The

 

Large Mart accounting department has determined that the interest

 

rate implicit in the lease is 12%, and that the market price of the

 

photocopier at the time the lease contract is signed is equal to

 

$15,000.

 

Required:

 

.

 


 

a) Calculate the present value of the minimum lease payments

 

AND outline the required calculations. (2 marks)

 


 

.

 


 

b) Determine if the lease is a finance lease or an operation lease,

 

and provide a DETAILED explanation of your decision. (2

 

marks)

 


 

.

 


 

c) Provide all journal entries that are necessary in the books of

 

Large Mart to account for the signing of the lease contract AND all

 

lease payments that Large Mart makes during the financial year

 

ended 30 June 20x3. (3 marks)

 


 

.

 


 

d) State the amount of depreciation that will be recorded in the

 

books of Large Mart for the year ended 30 June 20x3, assuming

 


 

that Large Mart uses the sums-of-digits depreciation method AND

 

outline the required calculations.

 


 

 

Paper#9256889 | Written in 27-Jul-2016

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