Financial Accounting for Hungry Macs Ltd.
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Hungry Macs Ltd is a chain of fast food restaurants and is renewing a restaurant and associated block of land from Red Leasing Ltd. The lease has always been treated as an operating lease however with the only
difference this renewal is that the building is set to be demolished at the end of the lease term and land sold to make way for a mega store.
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Details of the lease are:
- 3 year lease term from 1 January 2009
- Four payments of $150 000,
− 1st Payment on 1 January 2009
− Remaining payments 31st of December each year
? Includes rent for the land is considered to be $50 000 per annum
? The building is expected to be demolished at the end of three years so has
no scrap value
? Implicit interest rate is 10%
? Hungry Macs Ltd needs to leave the property by 31 December 2011
returning it to the leasing company
? The land is considered to have a fair value of $500 000
Required
a. Classify the lease.
b. Provide journal entries for Hungry Macs Ltd for the year ending
31 December 2009.
c. Provide journal entries for read Leasing Ltd for the year ending
31 December 2009.
d. Provide journal entries for Hungry Macs Ltd for the year ending
31 December 2011.
e. Provide journal entries for read Leasing Ltd for the year ending
31 December 2011.
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Solution Summary
The solution examines financial accounting for Hungry Macs Ltd. The lease is classified and provides journal entries for the ending year.
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ANSWERS
Does the lease meet one of more of the capital lease criteria? Yes. The ...
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