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Determine the rate of interest implicit in the lease

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Reference no: EM132971326

Burt Ltd enters into a non-cancellable five-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1 294 384.

  • The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210 000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the fifth year for $280 000.
  • There are to be five annual payments of $350 000, the first being made on 30 June 2024. Included within the $350 000 lease payments is an amount of $35 000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

Problem (a) Determine the rate of interest implicit in the lease and calculate the present value of the lease payments.

Problem (b) Prepare the journal entries in the books of Burt Ltd for the years ending 30 June 2024 and 30 June 2025.

Problem (c) Prepare the portion of the statement of financial position for the year ending 30 June 2025 relating to the lease asset and lease liability.

Reference no: EM132971326

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