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Katy Corp. purchased an item of equipment on 1 July 2020 and leased this equipment...

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Accounting

Katy Corp. purchased an item of equipment on 1 July 2020 and leased this equipment to Perry Ltd on the same day. The equipment is to be depreciated on a straight-line basis. The financial year-end date is 30 June. The following information is available:

  • Lease term: 5 years
  • Lease payments: the annual lease payment is $30,000. The first annual lease payment is payable on 1 July 2020. The subsequent four annual lease payments are due on 30 June.
  • Useful life of the equipment: 6 years
  • Interest rate implicit in the lease: 10%
  • The residual value at the end of the lease term is expected to be $8,000, of which Perry Ltd guaranteed is $6,500.

Katy Corp. classifies the lease as a finance lease.

REQUIRED:

  1. What is the balance of Lease Receivable that Katy Ltd should record on its balance sheet at the inception date of the lease?
  2. What is the depreciation expense that Katy Ltd should record for the financial year ended on 30 June 2021?

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