Question
On January A Ltd leased equipment to B Ltd for a fouryear period ending
December at which time possession of the leased asset will revert back to A Ltd The
cash price of the equipment is $ and has an expected useful life of six years. The
expected residual value of $ at December is not guaranteed. Equal
payments under the lease are $ The first payment was made on January and
subsequent payments due on December of each year. Both companies have the
accounting period ended at December of each year. B Ltds incremental borrowing rate is
B Ltd knows the interest rate implicit in the lease payments is Both
companies use straightline depreciation method.
Required:
a How should this lease be classified by B Ltdthe lessee Why?
b Prepare the appropriate entries for B Ltd for the year of
c Prepare the appropriate entries for B Ltd on December assuming the
equipment is returned to A Ltd and the actual residual value on the date is $
