Autumn plc enters a lease on January 1, 2019 to use machinery for its operations. The terms of the lease are as follows:The term of the lease is 4 years. The lease agreement is non-cancellable requiring equal rental payments of $25,711.11 at the beginning of each year (annuity-due basis)The machine had a fair value at the commencement of the lease of $100,000, an estimated economic life of five years and a guaranteed residual value of $5,000The lease contains no renewal optionsAutumn’s incremental borrowing rate is 5% per yearAutumn uses the straight-line method to depreciate its machineryThe lessor sets the annual rental rate of return of 4% per year and Autumn is aware of this rate.Required:Prepare the necessary journal entries for 2019.State two major ratios of Autumn plc that would be affected by the above lease arrangement

Lease is the agreement between the lessor and lessee under which lessor leases assets to the lessee…

Answered: Autumn plc enters a lease on January 1,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Autumn plc enters a lease on January 1, 2019 to use machinery for its operations. The terms of the lease are as follows:

The term of the lease is 4 years. The lease agreement is non-cancellable requiring equal rental payments of $25,711.11 at the beginning of each year (annuity-due basis)
The machine had a fair value at the commencement of the lease of $100,000, an estimated economic life of five years and a guaranteed residual value of $5,000
The lease contains no renewal options
Autumn’s incremental borrowing rate is 5% per year
Autumn uses the straight-line method to depreciate its machinery
The lessor sets the annual rental rate of return of 4% per year and Autumn is aware of this rate.

Required:

Prepare the necessary journal entries for 2019.
State two major ratios of Autumn plc that would be affected by the above lease arrangement

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