Refer to the information in P20–3.
In P On January 1, 2011, Hunter Ltd. entered into an agreement to lease a truck from Situ Ltd. Both Hunter and Situ use IFRS. The details of the agreement are as follows:
Carrying value of truck for Situ Ltd.………..………………………. $20,691
Fair value of truck …………………………………………………… $20,691
Economic life of truck ………………………………………………. 5 years
Lease term …………………………………………………………… 3 years
Rental payments (at beginning of each month) …………………….. $620
Executory costs included in rental payments each month for insurance.. $20
Incremental borrowing rate for Hunter Ltd……………………………… 12%
Hunter Ltd. guarantees Situ Ltd. that at the end of the lease term Situ Ltd. will realize $3,500 from selling the truck.
Instructions
(a) Prepare the journal entries that Situ would make on January 1, 2011, and the adjusting journal entries at December 31, 2011, to record the annual interest income from the lease arrangement, assuming that Situ has a December 31 fiscal year end.
(b) Identify all accounts that will be reported by Situ Ltd. on its comparative income statement for the fiscal years-ending December 31, 2012, and 2011, and its comparative statement of financial position at December 31, 2012, and 2011. Be specific about the classifications in each statement.
(c) Prepare a partial comparative statement of cash flows for Situ for the years ended December 31, 2012, and 2011, for all transactions related to the information in P20-3. Be specific about the classifications in the financial statement.
(a)
January 1, 2011
Lease Payments Receivable............ 25,100
Equipment........................ 20,691
Unearned Interest Income—Leases.. 4,409
Cash................................. 620
Insurance Expense................ 20
Lease Payments Receivable........ 600
December 31, 2011
Unearned Interest Income—Leases...... 1,984
Interest Income—Leases........... 1,984
Interest Receivable................... 155
Interest Income—Leases............ 155
(b)
Situ Ltd. | |
Income Statement | |
For the Year Ended December 31, | |
| |
2012 2011 |
Revenue
Interest Income—Leases* $1,497 $2,139
Other expenses
(Recovery) of insurance expense (240) (240)
* from lease amortization schedule part (c) of P20-2
Situ Ltd.
Balance sheet
December 31,
2012 2011
Current assets
Interest receivable $98 $155
Interest receivable $98 $155
Net investment in leases 9,828 5,647
Non-current assets
Net investment in leases 9,828
Balance $9,926 $15,630
Net investment in lease : 2012 2011
Beginning balance..................... 15,475 20,691
Less recovery in year (see table P20-3) (5,647) (5,216)
Ending balance........................ $9,828 15,475
Recoverable within 12 months.......... (5,647)
Non-current portion of net investment. $9,828
Reconciliation of balance:
From lease amortization schedule P20-3:
Balance at December 31 $9,828 $15,475
Add accrued interest 98 155
Balance $9,926 $15,630
(c)
Situ Ltd. | |
Statement of Cash Flows | |
For the Year Ended December 31, | |
| |
2012 2011 |
Indirect Format:
Cash flows from operating activities
(Increase) decrease in interest receivable $57 ($155)
Investing Activities:
Collected on finance lease* 5,646 5,216
Increase in finance lease (net) (20,691)
Direct Format:
Cash flows from operating activities
Cash collected for interest** $1,554 $1,984
Cash collected for insurance expense 240 240
* Amounts are the same as Cash paid on finance lease – financing activity of Hunter Ltd. P20-3 part (g)
** Amounts are the same as Cash paid for interest – operating activity of Hunter Ltd. P20-3 part (g)
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