XYZ Co. Ltd. has entered into an agreement with a finance company, to lease a machine for
Question:
XYZ Co. Ltd. has entered into an agreement with a finance company, to lease a machine for a four year period. Under the terms of the agreement, the machine is to be made available to XYZ Co. Ltd. on 1 January 2019, when an immediate payment of Shs. 2,550,000 will be made, followed by seven semi-annual payments of an equivalent amount. The fair market price of the machine on 1 January 2019 is expected to be Sh. 16,320,000. The estimated life of this type of machine is four years. The implicit rate of interest in the transaction is 6.94% payable semi-annually are the corporate tax rate is 30%. XYZ Co. Ltd. has a policy of depreciating machines of this type over a four year period on the straight line basis. Assume the lease is to be capitalized.
Required:
i Show how the above transactions will be reflected in the income statement account of XYZ Co. Ltd. for each of the four years ending 31 December 2019, 2020, 2021 and 2022.
ii Statement of financial position extracts for XYZ Co. Ltd. as at 31 December 2019 and 2020. (Use the actuarial method to allocate the interest charge).
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts