ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery. There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for $90 000. The machinery is expected to have a useful life of five years There are to be five annual payments of $140 000, the first being made on 30 June 2024. Included within these payments is $20 000 representing payment to the lessor for insurance and maintenance of the equipment. Additional information Implicit interest rate: 8 per cent Present value of an annuity in arrears of $1 for five years at 8 per cent = 3.9927 Present
ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery. There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for $90 000. The machinery is expected to have a useful life of five years There are to be five annual payments of $140 000, the first being made on 30 June 2024. Included within these payments is $20 000 representing payment to the lessor for insurance and maintenance of the equipment. Additional information Implicit interest rate: 8 per cent Present value of an annuity in arrears of $1 for five years at 8 per cent = 3.9927 Present
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery.
There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for $90 000. The machinery is expected to have a useful life of five years
There are to be five annual payments of $140 000, the first being made on 30 June 2024. Included within these payments is $20 000 representing payment to the lessor for insurance and maintenance of the equipment.
Additional information
Implicit interest rate: 8 per cent
Present value of an annuity in arrears of $1 for five years at 8 per cent = 3.9927
Present value of $1 in five years at 8 per cent = 0.6806
Required:
a) Determine the initial measurement of the lease liability
b) Determine the initial measurement of right-of-use asset cost
c) Provide the accounting journal entries for the year ended 30 June 2024
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