Question

Using Australian Accounting System - Latrobe University

Harry Ltd enters into a non-cancellable five-year lease agreement with Porter Ltd on 1 July 2018. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192.

The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Harry Ltd will be able to exercise at the end of the fifth year for $140,000.

There are to be five annual payments of $175,000, the first being made on 30 June 2019. Included within the

$175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12%.

Required:

1. Prepare the minimum lease payment schedule for Harry Ltd for the first 3 years.                      

2. Prepare the journal entries in the books Harry Ltd for the years ending 30 June 2019 and 30 June 2020.

Prepare the extract of the statement of financial position for the year ending 30 June 2019 and comparative year relating to the lease asset and lease liability.

Answer 1