Question

Supply Ltd entered into a non-cancellable five-year lease arrangement with Customer Ltd on 1 July 2019....

Supply Ltd entered into a non-cancellable five-year lease arrangement with Customer Ltd on 1 July 2019. The lease is for an item of machinery that has a fair value of $341 460 at the inception of the lease.

The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $60 000. There is a bargain purchase option that Customer Ltd will be able to exercise at the end of the fifth year for $30 000.

There are to be five annual payments of $90 000, the first being made on 30 June 2020. Customer Ltd determined that this contract contains a lease.

REQUIRED:

  1. (1) Determine the rate of interest rate implicit in the lease.

  2. (2) Prepare the journal entries in the books of the lessee (Customer Ltd) from 1 July 2019 to 30 June 2020 (the end of the reporting period). Show all working and round to the nearest dollar.

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