Deliveries plc leased a truck from a truck dealer, City Vans plc. City Vans plc acquired the truck at

a cost of 320,000 on 1 May 2019. The truck will be painted with Deliveries plcs logo and

advertising and the cost of repainting the truck to make it suitable for another owner four years

later is estimated to be 40,000. Deliveries plc plans to keep the truck after the lease but has not

made any commitment to the lessor to purchase it. The terms of the lease are as follows:

Date of entering lease: 1 July 2019.

Duration of lease: four years.

Life of leased asset: five years, after which it will have no residual value.

Lease payments: 100,000 at the end of each year (i.e. 30 June).

Interest rate implicit in the lease: 10 per cent.

Unguaranteed residual: 50,000.

Fair value of truck at inception of the lease: 351,140.

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Demonstrate that the interest rate implicit in the lease is 10 per cent.

(4 marks)

ii) Provide the journal entries to account for the lease transaction in the books of the lessor, City

Vans plc, at 1 July 2019 and 30 June 2020.

(6 marks)

iii) Provide the journal entries to account for the lease transaction in the books of the lessee,

Deliveries plc, at 1 July 2019 and 30 June 2020.

(6 marks)