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timothytomas2046
timothytomas2046
17.01.2022 • 
Advanced Placement (AP)

On 1 st January 2017, Somerset Plc. a manufacturing company, leased a packaging equipment from Prowler Engineers, a company that specialises in making customized industrial machinery. The terms of the lease agreement provided the following: ● Somerset Plc. was to pay annual lease rentals of £200,000 at the beginning of every year under the lease period ● The implicit interest was 10% p.a. ● A residual value of £40,000 was unguaranteed ● The lease period was for 5 years which was equivalent to the economic life of the packaging equipment ● Depreciation was to be computed using the reducing balance method, at the rate of 25% p.a ● Interest over the lease period was to be spread using the sum-of-digits method At the time of entering into the lease agreement, Somerset Plc. had established that the incremental borrowing rate would be 12% p.a. Required a. Prepare journal entries to record the transactions that occur in each of the 5 years of the lease agreement b. Prepare extracts of the Statement of Profit or Loss and the Statement of Financial Position for each of the 5 years of the lease agreement.

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