Calculate the present value of mango minimum lease payment

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Reference no: EM132558079

On 1 July 2020, Mango Ltd leases an aircraft from Kulula Ltd for five years. The fair value of the aircraft is $9.5 million. Under the terms of the lease arrangement, Mango Ltd is required to make five annual payments of $2 million with the first payment due immediately. Each repayment includes $120,000 for maintenance arranged by the lessor. The lease has an interest rate of 13%. The residual value of the aircraft is $3 million, of which Mango guarantees 65%. The aircraft has a useful life of six years.

Required (round all answers to the nearest dollar)

Question i Calculate the present value of Mango's minimum lease payments.

Question ii Prepare journal entries in Mango's books on 1 July 2023

Question iii Before the lease agreement was finalized, Kulula Ltd offered Mango Ltd the opportunity to purchase the aircraft for $1.5 million at the end of the lease. Outline the benefits and risks to Mango Ltd if it accepts the proposal, providing supporting calculations.

Reference no: EM132558079

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