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Au Farm Ltd leases a Tractor from Agrimachine Ltd that cost Agrimachine Ltd S 80 000 to manufacture. The lease agreement started on 1 July 2022 for 8 years. The life of the Tractor is estimated to be 8 years with an unguaranteed residual value of $20 000. Lease payments include $10 000 on 1 July 2022 and $12 000 on 30 June of each year for years. The rate of interest implicit in the lease is 6% Required: a) Prepare the journal entry on 1 July 2022 in the books of Agrimachine Ltd b) Prepare the journal entry on 30 June 2023 in the books of Au Farm Ltd. c) Explain the exceptional conditions that lease assets and lease liability are not recognised and the lease contract is considered as an operating lease

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YOUR QUESTION IS WAY TOO HARD BUT HERES THE ANSWER:

a) Journal entry on 1 July 2022 in the books of Agrimachine Ltd:

Lease Receivable Dr. $80,000

To Lease Income Cr. $80,000

This entry records the initial recognition of the lease receivable for the Tractor leased to Au Farm Ltd.

b) Journal entry on 30 June 2023 in the books of Au Farm Ltd:

Lease Expense Dr. $12,000

To Cash Cr. $12,000

This entry records the lease expense paid by Au Farm Ltd to Agrimachine Ltd for the year ended 30 June 2023.

c) The exceptional conditions that lead to the lease assets and lease liability not being recognized and the lease contract being considered an operating lease include:

The lease term being equal to the estimated economic life of the leased asset.

The unguaranteed residual value not being significant.

The present value of lease payments not exceeding a substantial portion of the fair value of the leased asset.

These conditions indicate that the risks and rewards of ownership are not effectively transferred to the lessee, and the lease is more akin to a rental agreement. As a result, the lease is treated as an operating lease rather than a finance lease, and the lease assets and lease liability are not recognized on the balance sheet of the lessee.

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''Ahmed Mansur''

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