On 1 January 2021, YoYo Limited signed a non-cancellable lease agreement to lease a photocopier from...

 

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On 1 January 2021, YoYo Limited signed a non-cancellable lease agreement to lease a photocopier from Marvel Limited. The following information related to the agreement is: (1) The lease term is 5 years with equal annual rental payments of $8,000 at the beginning of each year, starting from 1 January 2021. (2) The fair value and the cost of the photocopier on 1 January 2021 is $120,000 and $100,000, respectively. (3) The photocopier has an estimated useful life of 10 years. Both YoYo and Marvel adopt straight-line method for depreciation. (4) At the end of the lease term, both parties expect the photocopier to have a residual value of $80,000, none of which is guaranteed. (5) The lease is non-renewable and the asset has to be reverted back to the lessor at the termination of the lease. (6) Collectability of lease payments by lessor is probable. The implicit rate used by Marvel is 8%, which is known by YoYo. (7) Both companies' financial year-end is 31 December. Required: (Answers should be rounded to the nearest dollar.) (a) Explain how Marvel Limited should classify the lease of the photocopier according to five criteria tests supporting with detailed workings or computations where appropriate. (8 marks) (b) Prepare the extracted income statement for Marvel Limited in relation to the lease arrangement for the year ended 31 December 2021. (2 marks) (c) Prepare the journal entries on YoYo Limited's book to reflect the signing of the lease agreement and to record the payment and expenses related to this lease for the year of 2021 (Note: Show the dates of entries clearly). (7 marks) On 1 January 2021, YoYo Limited signed a non-cancellable lease agreement to lease a photocopier from Marvel Limited. The following information related to the agreement is: (1) The lease term is 5 years with equal annual rental payments of $8,000 at the beginning of each year, starting from 1 January 2021. (2) The fair value and the cost of the photocopier on 1 January 2021 is $120,000 and $100,000, respectively. (3) The photocopier has an estimated useful life of 10 years. Both YoYo and Marvel adopt straight-line method for depreciation. (4) At the end of the lease term, both parties expect the photocopier to have a residual value of $80,000, none of which is guaranteed. (5) The lease is non-renewable and the asset has to be reverted back to the lessor at the termination of the lease. (6) Collectability of lease payments by lessor is probable. The implicit rate used by Marvel is 8%, which is known by YoYo. (7) Both companies' financial year-end is 31 December. Required: (Answers should be rounded to the nearest dollar.) (a) Explain how Marvel Limited should classify the lease of the photocopier according to five criteria tests supporting with detailed workings or computations where appropriate. (8 marks) (b) Prepare the extracted income statement for Marvel Limited in relation to the lease arrangement for the year ended 31 December 2021. (2 marks) (c) Prepare the journal entries on YoYo Limited's book to reflect the signing of the lease agreement and to record the payment and expenses related to this lease for the year of 2021 (Note: Show the dates of entries clearly). (7 marks)