On 01/01/2019, Flowers Ltd. entered into a contract with Daisy Ltd. to lease a non-current asset for 3 years. To obtain the lease, Daisy Ltd. incurs in initial direct costs of £7,000 that are paid in credit. Daisy Ltd. must pay £12,000 each year with the lease payments commencing on 31/12/2019. Daisy Ltd. can borrow at a rate of 11% each year. At the end of the lease contract, the ownership of the non-current asset will not be transferred to Daisy Ltd. The useful life of the non-current asset is 10 years. Required: a) After doing the necessary calculations, draw all the journal entries for years 2019, 2020 and 2021 for Daisy Ltd. considering the accounting treatment of the leasing contract from the point of view of Daisy Ltd. b) Describe the accounting treatment for Flowers Ltd (calculations and journal entries are not required for this question). c) How would the accounting treatment change for Daisy Ltd and Flowers Ltd if, at the end of the contract, the ownership of the non-current asset is transferred to the lessee (calculations and journal entries are not required for this question). d) Assume that you work as a financial advisor, which arguments would you use to convince your client that a leasing contract can be a convenient alternative to acquire an asset?
On 01/01/2019, Flowers Ltd. entered into a contract with Daisy Ltd. to lease a non-current asset for 3 years. To obtain the lease, Daisy Ltd. incurs in initial direct costs
of £7,000 that are paid in credit. Daisy Ltd. must pay £12,000 each year with the lease payments commencing on 31/12/2019. Daisy Ltd. can borrow at a rate of 11% each year. At the end of the lease contract, the ownership of the non-current asset will not be transferred to Daisy Ltd. The useful life of the non-current asset is 10 years.
Required:
a) After doing the necessary calculations, draw all the
b) Describe the accounting treatment for Flowers Ltd (calculations and journal entries are not required for this question).
c) How would the accounting treatment change for Daisy Ltd and Flowers Ltd if, at the end of the contract, the ownership of the non-current asset is transferred to the lessee
(calculations and journal entries are not required for this question).
d) Assume that you work as a financial advisor, which arguments would you use to convince your client that a leasing contract can be a convenient alternative to acquire an asset?
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