Medusa Plc Enters into a Non-Cancellable 10-Year Lease with Lennox

question 2

Multiple Choice

Medusa Plc enters into a non-cancellable 10-year lease with Lennox Plc on 1 July 2013.The lease is for an item of equipment that at the inception of the lease has a fair value of £322 572 (the amount that Medusa paid for the asset on 1 July 2013) .The equipment is expected to have a useful life of 12 years and the lease term is for 10 years.The lease contract includes a bargain purchase option of £4000 that Lennox Plc will be able to exercise at the end of the 10-year lease.The lease payments will be made on 30 June each year,beginning 30 June 2014.The payments are to be £55 000 each year with £5000 of this being for executory costs to cover maintenance of the equipment.The maintenance will be carried out annually.The interest rate implicit in the lease is 9%.What are the entries in the books of Medusa Plc for 1 July 2013 and 30 June 2014 (round amounts to the nearest pound) ?

• A) 01 July 2013
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 322572 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2014\)
• \(\begin{array}{|c|l|r|r|}
• \hline \mathrm{Dr} & \text { Cash } & 50000 & \\
• \hline \mathrm{Cr} & \text { Interest revenue } & & 29032 \\
• \hline \mathrm{Cr} & \text { Lease receivable } & & 20968 \\
• \hline \mathrm{Dr} & \text { Lease receivable } & 5000 & \\
• \hline \mathrm{Cr} & \text { Executory expense recoupment } & & 5000 \\
• \hline
• \end{array}\)
• B) 01 July 2013
• \(\begin{array}{|r|l|r|r|}
• \hline \mathrm{Dr} & \text { Equipment } & 322572 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 322572 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Lease receivable } & 320883 & \\
• \hline \mathrm{Dr} & \text { Loss on lease agreement } & 1689 & \\
• \hline \mathrm{Cr} & \text { Equipment } & & 322572 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2014\)
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Cash } & 55000 & \\
• \hline \mathrm{Cr} & \text { Interest revenue } & & 28879 \\
• \hline \mathrm{Cr} & \text { Lease receivable } & & 26121 \\
• \hline
• \end{array}\)
• C) 01 July 2013
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Equipment } & 322572 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 322572 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Lease receivable } & 272572 & \\
• \hline \mathrm{Dr} & \text { Deferred executory costs } & 50000 & \\
• \hline \mathrm{Cr} & \text { Equipment } & & 322572\\
• \hline
• \end{array}\)
• \(30 \text { June } 2014\)
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Cash } & 50000 & \\
• \hline \mathrm{Cr} & \text { Interest revenue } & & 24531 \\
• \hline \mathrm{Cr} & \text { Lease receivable } & & 25469 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Cash } & 5000 & \\
• \hline \mathrm{Cr} & \text { Deferred executory costs } & & 5000 \\
• \hline
• \end{array}\)
• D) 01 July 2013
• \(\begin{array}{|c|l|l|l|}
• \hline \mathrm{Dr} & \text { Equipment } & 322572 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 322572 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\
• \hline \mathrm{Cr} & \text { Equipment } & & 322572 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2014\)
• \(\begin{array}{|c|l|l|l|}
• \hline \mathrm{Dr} & \text { Equipment } & 322572 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 322572 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\
• \hline \mathrm{Cr} & \text { Equipment } & & 322572 \\
• \hline
• \end{array}\)

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