Hopeful limited leased a portable sound recording studio from Lessor Limited. Lessor Limited has no material initial direct costs. Hopeful Limited does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will ne//ed a larger studio. The terms of the lease are as follows:
– Date of entering lease: 1 July 2011
– Duration of lease: 4 years
– Life of leased asset: 5 years
– Lease payments: $50,000 at the beginning of each financial year
– First lease payment: 1 July 2011
– Lease expires: 1 July 2015
– Interest rate implicit in the lease: 8%
– Guaranteed residual: $40,000
a) Determine the fair value of the portable sound recording studio at 1 July 2011.
b) Prepare a schedule for the lease payments incorporating accrues interest expense
c) Prepare the journal entries to account for the lease in the books of Hopeful Limited at 1 July 2011, 30 June 2012 and 1 July 2012.
d) At the termination of the lease Hopeful Limited returns the portable sound recording studio to Lessor Limited but its fair value at that time is $25,000. What must Hopeful Limited do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Limited for return of the asset to Lessor Limited and the settlement of all obligations under the lease on 1 July 2015.
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