Reference no: EM132607102

Because of his continued inability to keep up with other riders when cycling, Scott Thomson from Melbourne decides to take action to reduce the popularity of cycling. To this end, he decides to pursue the development of motorised roller blades, a product some might see as offering an alternative to cycling. To do so, he forms Thomson Ltd. To make the roller blades, Thomson Ltd needs to acquire some machinery from Fernster Ltd, which designs and manufactures the machinery. To manufacture the equipment, which has an estimated economic life of eight years, costs Fernster Ltd $200 000.The interest rate implicit in the lease is 10%

Thomson Ltd decides to lease the equipment from Fernster Ltd for a period of seven years, by way of a non-cancellable lease. The lease commences on 1 July 2019. The lease payments are made at the end of each year and amount to $55 000. The lease payments include reimbursement of Fernster Ltd's costs for servicing the machinery at an amount of $5000 per annum. There is an unguaranteed residual at the end of the lease term of $40 000, which represents expectations of what the lessee and lessor expect the machinery to be worth at the end of the lease term.

REQUIRED

Question 1: Calculate lease assset and lease liability

Question 2: Provide the journal entries in the books of Thomson Ltd as at 1 July 2019 and 30 June 2020.

Question 3: Provide the journal entries in the books of Fernster Ltd as at 1 July 2019 and 30 June 2020.