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Prove that the interest rate implicit in the lease

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Reference no: EM132525420

On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at the commencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease payment of $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 June each year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of $25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship. There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136.

Required:

a) Prove that the interest rate implicit in the lease is 10 percent.

b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020.

c) Provide the entries for the lease in the books of XFinance Ltd as at 1 July 2019, and 30 June 2020.

Reference no: EM132525420

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