Katy Corp. purchased an item of equipment on 1 July 2020 and leased this equipment to Perry Ltd on the same day. The equipment is to be depreciated on a straight-line basis. The financial year-end date is 30 June. The following information is available:

• Lease term: 5 years
• Lease payments: the annual lease payment is $30,000. The first annual lease payment is payable on 1 July 2020. The subsequent four annual lease payments are due on 30 June.
• Useful life of the equipment: 6 years
• Interest rate implicit in the lease: 10%
• The residual value at the end of the lease term is expected to be $8,500, of which Perry Ltd guaranteed is $5,500.

Katy Corp. classifies the lease as a finance lease.

Do not include commas and dollar sign ($) in your answer. Present $1,000 as 1000. Round all your answers to the nearest whole dollar amount.

• What is the present value of guaranteed residual value?
• What is the balance of Lease Liability that Perry Ltd should record on its balance sheet at the inception date of the lease?
• What is the balance of Lease Receivable that Katy Ltd should record on its balance sheet at the inception date of the lease?
• What is the depreciation expense that Katy Ltd should record for the financial year ended on 30 June 2021?

Answer rating: 100% (QA)

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