Reference no: EM132887305

On 30 June 2020, VTC Ltd entered into an agreement to lease a piece of equipment to THEi Ltd. On the same day, VTC Ltd paid $6,500 for preparing the lease agreement. Details of the lease are as follows:

• Inception of lease and beginning of lease term, 30 June 2020.
• Lease term, 5 years.
• Economic and useful life of the equipment, 6 years.
• Fair value of equipment, $839,377.
• VTC's cost of the equipment as at 30 June 2020, $800,000.
• Estimated scrap value at the end of the useful life of the equipment, $9,765.
• Total residual value of $60,000 of which $40,000 is guaranteed by THEi.
• Five annual lease payments of $220,000 payable each 30 June. The first lease payment is made in arrears on 30 June 2021.
• Included in the annual lease payments is an amount of $20,000 representing payment to VTC for executory costs of insurance and maintenance of the equipment.
• At the end of the lease term, THEi has the option to purchase the equipment and THEi intends to exercise this option.
• The interest rate implicit in the lease is 8% p.a.
• The lease is non-cancellable.

Required:

Problem (a) Prove that the interest rate implicit in the above lease is 8%.

Problem (b) Prepare journal entries in the books of THEi Ltd for the years ended 30 June 2020 and 2021.

Problem (c) Prepare journal entries in the books of VTC Ltd for the years ended 30 June 2020 and 2021.