Refer
to the information in P20–3.
In
P On January 1, 2011, Hunter Ltd. entered into an agreement to lease a truck
from Situ Ltd. Both Hunter and Situ use IFRS. The details of the agreement are
as follows:
Carrying
value of truck for Situ Ltd.………..………………………. $20,691
Fair
value of truck …………………………………………………… $20,691
Economic
life of truck ………………………………………………. 5 years
Lease
term …………………………………………………………… 3 years
Rental
payments (at beginning of each month) …………………….. $620
Executory
costs included in rental payments each month for insurance..
$20
Incremental
borrowing rate for Hunter Ltd……………………………… 12%
Hunter
Ltd. guarantees Situ Ltd. that at the end of the lease term Situ Ltd. will
realize $3,500 from selling the truck.
Instructions
(a)
Prepare the journal entries that Situ would make on January 1, 2011, and the
adjusting journal entries at December 31, 2011, to record the annual interest
income from the lease arrangement, assuming that Situ has a December 31 fiscal
year end.
(b)
Identify all accounts that will be reported by Situ Ltd. on its comparative
income statement for the fiscal years-ending December 31, 2012, and 2011, and
its comparative statement of financial position at December 31, 2012, and 2011.
Be specific about the classifications in each statement.
(c)
Prepare a partial comparative statement of cash flows for Situ for the years
ended December 31, 2012, and 2011, for all transactions related to the
information in P20-3. Be specific about the classifications in the financial
statement.
(a)
January
1, 2011
Lease Payments Receivable............ 25,100
Equipment........................ 20,691
Unearned
Interest Income—Leases.. 4,409
Cash................................. 620
Insurance
Expense................ 20
Lease
Payments Receivable........ 600
December 31, 2011
Unearned Interest Income—Leases...... 1,984
Interest
Income—Leases........... 1,984
Interest Receivable................... 155
Interest
Income—Leases............ 155
(b)
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Situ Ltd.
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Income Statement
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For the Year Ended
December 31,
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2012 2011
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Revenue
Interest Income—Leases* $1,497 $2,139
Other expenses
(Recovery) of insurance expense (240) (240)
* from lease amortization schedule part (c) of P20-2
Situ Ltd.
Balance sheet
December 31,
2012 2011
Current assets
Interest receivable $98 $155
Interest receivable $98 $155
Net
investment in leases 9,828 5,647
Non-current assets
Net
investment in leases 9,828
Balance $9,926 $15,630
Net
investment in lease : 2012 2011
Beginning balance..................... 15,475 20,691
Less recovery in year (see table P20-3) (5,647) (5,216)
Ending balance........................ $9,828 15,475
Recoverable within 12 months..........
(5,647)
Non-current portion of net investment. $9,828
Reconciliation of balance:
From lease amortization schedule P20-3:
Balance at
December 31 $9,828 $15,475
Add accrued
interest 98 155
Balance $9,926 $15,630
(c)
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Situ Ltd.
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Statement of Cash Flows
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For the Year Ended December 31,
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2012 2011
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Indirect Format:
Cash flows from operating
activities
(Increase) decrease in
interest receivable $57 ($155)
Investing Activities:
Collected on finance lease* 5,646 5,216
Increase in finance lease
(net) (20,691)
Direct Format:
Cash flows from operating
activities
Cash collected for
interest** $1,554 $1,984
Cash collected for
insurance expense 240 240
* Amounts are
the same as Cash paid on finance lease – financing activity of Hunter Ltd.
P20-3 part (g)
** Amounts are
the same as Cash paid for interest – operating activity of Hunter Ltd. P20-3
part (g)
