Corporate Accounting - Part 1 Lease

STATE HOW BOTH COMPANIES SHOULD CLASSIFY THE LEASE. GIVE REASONS FOR YOUR ANSWER. Both Purple Ltd and Lemon Ltd should classify the lease as a finance lease based on the below. Present value of all future lease payments = ($8,000 – $1,000) X 3.8897 = $27,228 Present value of guaranteed residual value = 50% X 7,200 X 0.6499 Total present value = $27,228 + $2,340 of the Bulldozer The present value of the minimum lease payments is substantially all of the fair value of the leased asset at the inception of the lease. Lemon Ltd can cancel the lease provided that it pays a penalty equal to 50% of the total lease payment to Purple Ltd. Lemon Ltd also guaranteed 50% of the residual value of the D9 bulldozer at the end of the lease term, should there be gains or losses from the fluctuation in the fair value of the residual. Lastly, the D9 bulldozer is not likely to be used by anyone else other than Lemon Ltd. PREPARE A SCHEDULE OF LEASE PAYMENTS FOR LEMON LTD. Includes bargain purchase option. Note: There is a rounding error of $1. PREPARE A SCHEDULE OF LEASE PAYMENTS FOR PURPLE LTD. Note: There is a rounding error of $1. JOURNAL ENTRIES For Lemon Ltd: (Depreciation expense = [$29,568 - $3,600] / 5 years = $5,194) For Purple Ltd: (Net Method) For Purple Ltd: (Gross Method) FINANCIAL STATEMENTS OF BOTH COMPANIES FOR YEAR ENDING 30 JUNE 2009 Lemon Ltd Extract of Financial Statement Note 5: Fees for finance lease Lemon Ltd lease D9 bulldozer under a 5 years finance lease agreement. Future minimum lease payments fall due as follows: Purple Ltd Extract of Financial Statement Note 5: Fees for finance lease The gross investment and the present value of minimum lease payments for Purple Ltd fall due as follows: REPORT Explain the difference between a finance lease and an operating lease. A finance lease enables a company to finance the purchase of