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Question 2 On 1 January 2021, A Ltd leased equipment to B Ltd....

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Accounting

Question 2
On 1 January 2021, A Ltd leased equipment to B Ltd. for a four-year period ending 31
December 2024, at which time possession of the leased asset will revert back to A Ltd. The
cash price of the equipment is $365,760 and has an expected useful life of six years. The
expected residual value of $25,000 at 31 December 2024, is not guaranteed. Equal
payments under the lease are $100,000. The first payment was made on 1 January 2021, and
subsequent payments due on 31 December of each year. Both companies have the
accounting period ended at 31 December of each year. B Ltd's incremental borrowing rate is
12%. B Ltd. knows the interest rate implicit in the lease payments is 10%. Both
companies use straight-line depreciation method.
Required:
(a) How should this lease be classified by B Ltd.(the lessee)? Why?
(b) Prepare the appropriate entries for B Ltd. for the year of 2021.
(c) Prepare the appropriate entries for B Ltd. on 31 December 2024, assuming the
equipment is returned to A Ltd. and the actual residual value on the date is $1,500.
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