Reference no: EM133179107

Question - Pegan Limited has a factory situated away from established commuter routes and provides bus transport for its employees from the city centre to the factory.

Pegan Limited entered into a contract with Pan Limited for the lease of a bus. The model and size of the bus is stated in the contract and Pan Limited does not have substitution rights.

The commencement date of the lease is 1 April 20X5 The lease agreement is for a period of four years and requires four lease payments in advance of C110 000. The first payment is due on 1 April 20x5 and the remaining three payments on 1 April 20X6, 1 April 20X7 and 1 April 20X8.

The contract stipulates a residual value guarantee of C80 000. At the inception of the lease, Pegan Limited expects that the fair value of the bus at the end of the lease term will be C42 500. The estimated useful life of the bus is six years.

Pegan Limited's incremental borrowing rate is 7%. The following present value table is provided

PV factor

Present value of annuity in advance of C1 for four years, discounted at 7% 3,62431

Present value of C1 in four years, discount at 7% 0,76289

The financial year end of Pegan Limited is 31 March.

Required - Prepare the journal entries in the accounting records of Pegan Limited for the year ended 31 March 20X6 (the first year of the contract) and 31 March 20X9 (the last year of the contract), extract from the statement of financial position and lease note.