Reference no: EM13486450

Finance lease - lessee and lessor

On 1 July 2010, Wellington Ltd acquired a new car. The manager of Wellington Ltd, Jack Wellington, went to the local car yard, Hamilton Autos, and discussed the price of a new Racer Special with John Hamilton. Jack and John agreed on a price of $37,876. As Hamilton Autos had acquired the vehicle from the manufacturer for $32,000, John was pleased with the deal. On discussing the financial arrangements in relation to the car, Jack decided that a lease arrangement was the most suitable. John agreed to arrange for Dunedin Ltd, a local finance company, to set up the lease agreement. Hamilton Autos then sold the car to Dunedin Ltd for $37,876.


Dunedin Ltd wrote a lease agreement, incurring initial direct costs of $534 in the process. The lease agreement contained the following clauses:
Initial payment on 1 July 2010 $13,000
Payments on 1 July 2011 and 1 July 2012 $13,000
Interest rate implicit in the lease 6%

The lease agreement also specified for Dunedin Ltd to pay for the insurance and maintenance of the vehicle, the latter to be carried out by Hamilton Autos at regular intervals. A cost of $3,000 per annum was included in the lease payments to cover these services.
Jack wanted the lease to be considered an operating lease for accounting purposes. To achieve this, the lease agreement was worded as follows:
The lease is cancellable by Wellington Ltd at any stage. However, if the lease is cancelled, Wellington Ltd agrees to lease, on similar terms, another car from Dunedin Ltd.
Wellington Ltd is not required to guarantee the payment of any residual value. At the end of the lease term, 30 June 2013, or if cancelled earlier, the car automatically reverts to the lessor with no payments being required from Wellington Ltd.

The vehicle had an expected economic life of 6 years. The expected fair value of the vehicle at 30 June 2013 was $12,000. Because of concern over the residual value, Paul Dunedin required Jack to sign another contractual arrangement separate from the lease agreement which gave Dunedin Ltd the right to sell the car to Wellington Ltd if the fair value of the car at the end of the lease term was less than $10,000.
Costs of maintenance and insurance paid by Dunedin Ltd to Hamilton Autos over the years ended 30 June 2011 to 30 June 2013 were $2,810, $3,020 and $2,750.
At 30 June 2013, Jack returned the vehicle to Dunedin Ltd. The fair value of the car was determined by to be $9,000. Dunedin Ltd invoked the second agreement. With the consent of Wellington, Dunedin Ltd sold the car to Hamilton Autos for a price of $9,000 on 5 July 2013, and invoiced Wellington Ltd for $1,000. Wellington Ltd subsequently paid this amount on 13 July 2013.
Required
Assuming the lease is classified as a finance lease, prepare:
1. a schedule of lease payments for Wellington Ltd
2. journal entries in the records of Wellington Ltd for the years ending 30 June 2011, 30 June 2013 and 30 June 2014
(For multiple debit/credit entries, list accounts in descending order.)

3. a schedule of lease receipts for Dunedin Ltd
(If answer is zero, please enter 0, do not leave any fields blank.)
4. journal entries in the records of Dunedin Ltd for the years ending 30 June 2011, 30 June 2013 and 30 June 2014.
(For multiple debit/credit entries, list accounts in descending order.)