Reference no: EM132563869

Thomas Ltd enters into a five-year lease agreement with Hardy Ltd on 1 July 2019 for an item of machinery. Thomas Ltd pays $4,000 to enter the lease contract (direct costs). Hardy Ltd incurs $6,000 of direct costs in arranging the lease. There is a payment of $80,000 to be made in advance each year, with the first being made on 1 July 2020. Included in these payments is $5,000 representing payment to the lessor for insurance and maintenance of the machinery. There is a purchase option that Thomas Ltd will be willing to exercise at the end of the fifth year for $60,000. The machinery is expected to have a useful life of eight years and a residual value of $20,000 at the end of its useful life.

The interest rate implicit in the lease is 8%.

Question 1: Determine the initial measurement of the lease liability.

Question 2: Determine the initial measurement of the right-of-use asset.

Question 3: Calculate the stream of interest expenses across the lease term.

Question 4: Calculate the annual amortisation on the right-of-use asset.

Question 5: Provide the accounting journal entries for Thomas Ltd for the year ended 30 June 2020.