Purple Ltd has entered into an agreement to lease a D9 bulldozer to Lemon Ltd. The lease agreement details are as follows:
Length of lease 5 years
Commencement date 1 July 2008
Annual lease payment, payable 30 June
each year commencing 30 June 2009 $8,000
Fair value of the bulldozer at 1 July 2008 $34,797
Estimated economic life of the bulldozer 8 years
Estimated residual value of the plant at the end
of its economic life $2,000
Residual value at the end of the lease term,
Of which 50% is guaranteed by Lemon Ltd $7,200
Interest rate implicit in the lease 9%
The lease is cancellable, but a penalty equal to 50% of the total lease payment is payable on cancellation. Lemon Ltd does not intend to buy the bulldozer at the end of the lease term. Purple Ltd incurred $1,000 to negotiate and execute the lease agreement. Purple Ltd purchased the bulldozer for $34,797 just before the inception of the lease.
Required:
A. State how both companies should classify the lease. Give reasons for your answer. (1.5 Marks)
Length of lease 5 years
Commencement date 1 July 2008
Annual lease payment, payable 30 June
each year commencing 30 June 2009 $8,000
Fair value of the bulldozer at 1 July 2008 $34,797
Estimated economic life of the bulldozer 8 years
Estimated residual value of the plant at the end
of its economic life $2,000
Residual value at the end of the lease term,
Of which 50% is guaranteed by Lemon Ltd $7,200
Interest rate implicit in the lease 9%
The lease is cancellable, but a penalty equal to 50% of the total lease payment is payable on cancellation. Lemon Ltd does not intend to buy the bulldozer at the end of the lease term. Purple Ltd incurred $1,000 to negotiate and execute the lease agreement. Purple Ltd purchased the bulldozer for $34,797 just before the inception of the lease.
Required:
A. State how both companies should classify the lease. Give reasons for your answer. (1.5 Marks)
