Assignment: Accounting for Lease
Problem 1:
Darwin Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of $180 000. The truck will be painted with Darwin Ltd's logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $40 000. Darwin Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years, after which it will have no residual value.
• Lease payments: $100 000 at the end of each year.
• Interest rate implicit in the lease: 10 per cent.
• Unguaranteed residual: $50 000.
• Fair value of truck at inception of the lease: $351 140.
Required
(a) Demonstrate that the interest rate implicit in the lease is 10 per cent.
(b) Prepare the journal entries to account for the lease transaction in the books of the lessor, City Vans Ltd, at 1 July 2019 and 30 June 2020.
(c) Prepare the journal entries to account for the lease transaction in the books of the lessee, Darwin Ltd. at 1 July 2019 and 30 June 2020.
(d) On 30 June 2023 Darwin Ltd. pays the residual of $50 000 and purchases the truck. all journal entries in the books of Darwin Ltd. for 30 June 2023 in relation to the termination of the lease and the purchase of the truck.
Problem 2: The Statement of Cash flows
Read the article adopted from Carol Altman's in Financial Accounting in the Real world 19.5 (on page 739 of your text book), ‘Cooking the books the Harris Scarfe way', and then answer the following questions:
(a) What does ‘cook the books' mean?
(b) How would a reader of financial statements know if the books had been cooked?
(c) Is it likely that creative accounting was employed to the statement of cash flows? Why or why not?
Cooking the books the Harris Scarfe way
Following the collapse of the Harris Scarfe retail empire in April 2001, Ferrier Hodgson, the receivers, launched an action in the Supreme Court in South Australia, presided over by Judge Bowen Pain, in an attempt to follow the trail of debt accumulation of the company.
The company expanded from its Rundle Mall flagship to 31 stores across Australia, six of which are earmarked for closure as a result of the collapse in April.
The chairman, Adam Trescowthick, and the managing director, Ron Baker are said to have ordered the former Harris Scarfe financial officer, Alan Hodgson (now unemployed), to provide them with the profit they ordered whether it bore any relationship to reality or not.
Mr Hodgson told the court that if he were unable to adjust the profit in a ‘conventional sense'-by making legitimate corrections-he would direct the company's systems accountant, Michael Johnson, to manipulate the gross profits.
‘I would simply sit down with Michael Johnson and say, "Mike, this is the result I am required to produce this year for whatever reasons" and he would put the adjustment over,' he said. Under cross-examination by Dick Worthington QC, Mr Hodgson said the ‘unbusinesslike and unconventional' adjustments started in 1997. ‘So this was profit through the manipulation of accounts,' Mr Worthington said. ‘That is correct,' Mr Hodgson replied.
The court was told that for the financial half-year ended January 1999, the company overstated its profits by $1.62 million to $6 million, including $605 000 from adjustments to gross profits across its stores and $1 million worth of adjustments to its general ledger.
It appeared from Hodgson's testimony that the manipulation of accounts was a long-standing practice at Harris Scarfe-Hodgson said it was happening back in 1997.
Hodgson said that Trescowthick and Baker would have been well aware of the falsification of the accounts. The two were also due to give evidence in the case.
There had been no decision announced by the Australian Securities & Investments Commission (ASIC) as to laying charges against Harris Scarfe officers for breaches of the Corporations Law.
SOURCE: Adapted from ‘I was told to cook books, says Harris Scarfe man', by Carol Altmann, The Australian, 7 August 2001, p. 1
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.