• On 1 October 20x2, Bergman Ltd (“BL”) acquired a machine for $378,100 which had an economic useful life of five years and no residual value. Due to a sudden drop in demand for its products, the company decided to rent it out on the same day for a non-cancellable lease term of four years. The lease agreement required annual lease payments of $50,000 with the first payment to be made to BL on 30 September 20x3. At the end of the lease term, the lessee can purchase the machine for $230,000 when the machine was expected to have a fair value of $300,000. It was reasonably certain, at the inception of the lease, that the lessee would exercise the option. The implicit interest rate for the lease had been determined to be 4% per annum. 

 

• To raise much needed funds for the business, BL also sold some motor vehicles to Snapshot Ltd (“SL”) at the fair value of $180,000 on 1 October 20x3 and immediately leased them back for its continued use. The non-cancellable lease term is five years and annual lease payments of $35,600 were payable on 30 September each year, commencing on 30 September 20x4. SL required a return of 6% per annum on the lease transaction and this rate was known to both parties. The vehicles were acquired by BL for $320,000 and had accumulated depreciation of $190,000 as at 1 October 20x3. The estimated remaining useful life of the motor vehicles on the same date was seven years. Both BL and SL are companies incorporated in Singapore with a financial year that ends on 30 September annually. 

Required: (a) Discuss the appropriate classification for the lease of machine in the books of BL by applying FRS 116 Leases. Prepare the necessary journal entries (indicate date of each entry but journal narratives are NOT required) for the year ended 30 September 20x3. Please show all workings clearly to get full credit and where necessary, round off your answers to the nearest dollar. (12 marks) 

(b) Prepare the necessary journal entries (indicate date of each entry but journal narratives are NOT required) for the year ended 30 September 20x4 with regards to the sale and leaseback of BL’s motor vehicles in the books of BL and SL with reference to FRS 116 Leases. Assume that the transfer of motor vehicles satisfies the requirements of FRS 115 Revenue from Contracts with Customers to be accounted for as a sale of asset. Show all workings clearly and provide clear explanations for the relevant accounting treatment adopted by BL and SL to get full credit. Where necessary, round off your answers to the nearest dollar.  

Answer rating: 100% (QA)

a The lease of the machine in the books of Bergman Ltd should be classified as a finance lease under ... View the full answer