CCC Ltd is in the business of manufacturing bricks. It has entered into a lease agreement on
Question:
CCC Ltd is in the business of manufacturing bricks. It has entered into a lease agreement on 1 January 20x1 to lease a standard brick-cutting machine from a leasing company, EEE Ltd, over a non-cancellable lease period of five years commencing 1 January 20x1. Annual lease payments are to be paid at the beginning of each of the five years with the first payment commencing on 1 January 20x1. On 1 January 20x1, the fair value of the machine is $500,000. The machine has a useful life of ten years and no residual value at the end of its useful life. Both companies adopt the cost model and the straight-line depreciation policy with respect to their property, plant and equipment under FRS 16 Property, Plant and Equipment. CCC Ltd has an incremental borrowing rate of 9% but knows the interest rate implicit in the lease of 8%. CCC Ltd guarantees EEE Ltd a sum of $210,000, which is the expected residual value, at the end of the lease term.
All the companies in this question are Singapore listed companies and adopt Singapore FRSs. All have December 31 year-ends. When presenting your answers, please round to the nearest dollar
a) Compute the annual lease payment for the lease agreement.
b) EEE Ltd records the lease as a finance lease under FRS 116 Leases. Compute the gross investment, net investment and unearned interest income and illustrate lease accounting by passing all necessary journal entries (no journal narrative required) on 1 January 20x1.
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella