In 2021, Vale do Rio Doce Ltd. had a financial crisis that forced them to make drastic decisions to reduce their operating costs. Vale owned a machine that was important for generating income. However, BHP Billiton could not find a similar machine on the market. Due to their strong relationship, Vale do Rio Doce Ltd. decided to lease their machine to BHP Billiton. On 30 June 2022, BHP Billiton Ltd. leased the machine from Vale do Rio Doce Ltd. The finance lease agreement contained the following provisions:

The lease is cancellable, but only with permission from the lessor. Included in the annual rental payment is an amount of $1,340 to cover the costs of maintenance and insurance paid for by the lessor. BHP Billiton Ltd. intends to return the machine to Vale do Rio Doce Ltd.

Required:

1. Calculate the lease liability and the right-to-use asset.

2. Prepare the lease schedules for the lessee.

3. Prepare the journal entries of the lessee on 30 June 2023.

4. Assume that during this lease agreement, Vale do Rio Doce Ltd. has reduced profit

   by $150,000. Critically evaluate whether the decision to lease this machine was good for Vale do Rio Doce Ltd. In your evaluation, consider the meaning of the ‘strong relationship’ and the impact on financial and non-financial users.
    

Transcribed Image Text:

Lease term 4 years Annual rental payment, in advance on 30 June each year (starting at 30/06/2022) $43,400 Estimated useful life of asset 5 years Estimated residual value of machine at end of lease term $12,000 Residual value guarantee by lessee $9,000 9% Interest rate implicit in the lease Lease term 4 years Annual rental payment, in advance on 30 June each year (starting at 30/06/2022) $43,400 Estimated useful life of asset 5 years Estimated residual value of machine at end of lease term $12,000 Residual value guarantee by lessee $9,000 9% Interest rate implicit in the lease

Answer rating: 100% (QA)

1 Lease liability righttouseasset PV of minimum lease payment PV of minimum l... View the full answer