On January 1, 2018, Khalid Ltd., which follows IAS 17, entered into an eight-year lease agreement for
On January 1, 2018, Khalid Ltd., which follows IAS 17, entered into an eight-year lease agreement for three dryers. Annual lease payments for the equipment are $28,500 at the beginning of each lease year, which ends December 31. Khalid made the first payment on January 1, 2018. At the end of the lease, the dryers will revert to the lessor. However, the dryers are expected to last for only eight years and have no residual value. At the time of the lease agreement, the dryers could be purchased for a total purchase price of approximately $166,000 cash. Equivalent financing for the equipment could have been obtained from Khalid's bank at 10.5%. Khalid's fiscal year coincides with the calendar year. Khalid uses straight-line depreciation for its equipment.
(a) Calculate the present value of the minimum lease payments using a financial calculator or Excel functions.
(b) Explain why this is a finance lease to Khalid Ltd. Document your calculations in arriving at your explanation.
(c) Prepare an amortization schedule for the term of the lease to be used by Khalid Ltd. Use Excel and round all amounts to the nearest dollar. (Note: You may find the =round formula helpful for rounding in Excel.)
(d) Prepare the journal entries on Khalid Ltd.'s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2018 and 2019 as well as any adjusting journal entries at its fiscal year ends of December 31, 2018 and 2019. Khalid does not use reversing entries.
(e) Prepare a partial comparative statement of financial position at December 31, 2019 and 2018 for all of the accounts related to this lease for Khalid Ltd. Be specific about the classifications that should be used.
(f) Provide Khalid Ltd.'s required note disclosure concerning the lease for the fiscal year ending December 31, 2019.
(g) What is the significance of the difference between the amount of the present value of the minimum lease payments calculated in part (a) and the approximate selling price of the machine of $166,000?
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