Reference no: EM132990018

Question - Tom Ltd manufactures specialised moulding machinery for both sale and lease. Tom Ltd leased a moulding machinery to Smith Ltd on 1 July 2019 for five years. The machinery has a fair value of $733,974 at the inception of the lease. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $100,000. There is a bargain purchase option that Smith Ltd will be able to exercise at the end of the fifth year for $150,000. There are to be five annual lease payments of $200,000, the first being made on 30 June 2020. Included within the $200,000 lease payments is an amount of $20,000 representing payment to the lessor for the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12%.

Required -

a) Prepare the minimum lease payment schedule for Smith Ltd for the first 3 years.

b) Prepare the journal entries in the books Smith Ltd for the years ending 30 June 2020 and 30 June 2021.

c) Prepare the extract of the statement of financial position for the year ending 30 June 2021 and comparative year relating to the lease asset and lease liability in the books of Smith Ltd.