Question

River Ltd enters into a non-cancellable lease agreement with Machinery Ltd on 1 January 2017. River Ltd’s financial year ends on 31 December. The lease consists of the following: Date of inception: 1/1/2017 Duration of lease: 5 years Life of leased asset: 6 years Guaranteed residual value (Added to final payment): $40,000 Implicit rate of interest: 8% Fair value at the inception of the lease $346,640 There are to be 5 annual payment of $90,000, the first being made on 31 December 2017. Included within the $90,000 lease payment is an amount of $10,000 representing payment to the Lessor Machinery Ltd for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. Required: a) Verify the implicit rate of interest is correct against Fair Value. b) Develop a table that shows the payment schedule to determine the interest expense for each year. c) Prepare the journal entries for River Ltd. using the Net Method at the following date. • 1/1/2017 • 31/12/2017 • 31/12/2018 (11 marks. Word limit: n/a) Please provide unique answer than others.

Answer 1

Solution: