Dry Ltd leased a building from Wet Ltd on 1 July 2019. The building is in the
Question:
Dry Ltd leased a building from Wet Ltd on 1 July 2019. The building is in the records of Wet Ltd at its fair value of $535,212 on 1 July 2019. Wet Ltd incurred $2,500 in costs to prepare and execute the lease document.
The lease agreement contained the following details:
| Lease term | 10 years |
| Economic life of the building | 15 years |
| Annual rental payments, in arrears (commencing 30/06/21) | $90,000 |
| Residual value of the building at the end of the lease term | $40,000 |
| Residual value of the building guaranteed by Hey Ltd | $25,000 |
| Interest rate implicit in the lease | 10% |
| PV of $1 in 10 years at 10% | 0.3855 |
| PV of $1 annuity at 10% with 9 payments | 5.7590 |
| PV of $1 annuity at 10% with 10 payments | 6.1446 |
The annual payments of $90,000 include $5,000 to reimburse Wet Ltd for maintenance and insurance costs that will need paid by Wet Ltd.
Dry Ltd incurred $1,650 in costs to negotiate the lease agreement. The building will be returned to Wet Ltd at the end of the lease term. Dry Ltd and Wet Ltd have a reporting period ending 30 June.
Required:
1. Prepare the necessary journal entries for the lease arrangement at 30 June 2020 in the records of Dry Ltd.
2. Calculate the lease receivable that Wet Ltd will recognize on 30 June 2019.
Expert Answer:
1 The journal entries for the lease arrangement at 30 June 2020 in the records of dry limited is rec... View the full answer
