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Determine the rate of interest rate implicit in the lease

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Reference no: EM132628433

Manus Ltd enters into a non-cancellable five-year lease agreement with Aries Ltd on 1 July 2015. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $454646. The machinery is expected to have an economic life of six years, after which time it will have an expected salvage value of $55 000. There is a bargain purchase option that Manus Ltd will be able to exercise at the end of the fifth year for $75 000. There are to be five annual payments of $120 000, the first being made on 30 June 2016. Included within the $120 000 lease payments is an amount of $10 000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

Required

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

Question b) Prepare the journal entries for the years ending 30 June 2016 and 30 June 2017.

Question c) Prepare the portion of the statement of financial position (balance sheet) relating to the leased asset and lease liability for the years ending 30 June 2016 and 30 June 2017.

Question d) Prepare the journal entries for the year ending 30 June 2020 (the final year of the lease).

Reference no: EM132628433

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