Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,297,968.

The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $260000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $290,000.

There are to be 8 annual payments of $350,000, the first being made on 30 June 2024. Included within the $350,000 lease payments is an amount of $40,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

REQUIRED

1. Determine the rate of interest implicit in the lease and calculate the present value of the minimum lease payments.

In this question implicit rate is(percentage)

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Proof Enter the proof in the table below

Description	Calculation	Total
Periodic lease payments	-----------------------	----------------------
Bargain purchase options	-----------------------	----------------------
Fair value at lease inception		- ---------------------

2. Prepare the journal entries in the books of Burt Ltd for the years ending 30 June 2024 and 30 June 2025.

1^st July 2023

Debit/Credit	Description	Debit Amount	Credit Amount
Debit	Right of use asset -Machinery	-----------------------
Credit	Lease Liability		-----------------------

30^th June 2024

Debit/Credit	Description	Debit Amount	Credit Amount
--------------------	Interest expenses	-----------------------	----------------------
--------------------	Lease Liability	--------------------	-----------------------
--------------------	Service Expenses	--------------------	--------------------
--------------------	Cash	--------------------	--------------------
--------------------	Depreciation Expenses	--------------------	--------------------
--------------------	Accumulated Expenses	--------------------	--------------------

30^th June 2025

Debit/Credit	Description	Debit Amount	Credit Amount
--------------------	Interest expenses	-----------------------	----------------------
--------------------	Lease Liability	--------------------	-----------------------
--------------------	Service Expenses	--------------------	--------------------
--------------------	Cash	--------------------	--------------------
--------------------	Depreciation Expenses	--------------------	--------------------
--------------------	Accumulated Expenses	--------------------	--------------------

3. Prepare the portion of the statement of financial position for the year ending 30 June 2024 and 2025 relating to the lease asset and lease liability.

Assets

Description	30 June 2024	30 June 2025
Non-Current Assets
Right of use asset-Machinery	---------------------------	----------------------------
Less accumulated depreciation	----------------------------	---------------------------

Liabilities

Description	30 June 2024	30 June 2025
Current Liabilities
Lease Liability	---------------------------	----------------------------
Non-Current Liabilities
Lease Liability	----------------------------	---------------------------

(d) Prepare the journal entries of Burt Ltd for the years ending 30 June 2024 and 30 June 2025 assuming that Burt Ltd classifies the lease as an operating lease.