Reference no: EM132669211

River Ltd enters into a non-cancellable lease agreement with Machinery Ltd on 1 January 2017. River Ltd's financial year ends on 31 December. The lease consists of the following: Date of inception: 1/1/2017 Duration of lease: 5 years Life of leased asset: 6 years Guaranteed residual value (Added to final payment): $40,000 Implicit rate of interest: 8% Fair value at the inception of the lease $346,640 There are to be 5 annual payment of $90,000, the first being made on 31 December 2017. Included within the $90,000 lease payment is an amount of $10,000 representing payment to the Lessor Machinery Ltd for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

Required:

Problem a) Verify the implicit rate of interest is correct against Fair Value.

Problem b) Develop a table that shows the payment schedule to determine the interest expense for each year.

Problem c) Prepare the journal entries for River Ltd. using the Net Method at the following date.

1. 1/1/2017
2. 31/12/2017
3. 31/12/2018