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Equipment Ltd leased new advanced computer equipment to STU Ltd on 1 January 2019. STU Ltd has to pay annual rental of $290,000 starting at
Equipment Ltd leased new advanced computer equipment to STU Ltd on 1 January 2019. STU Ltd has to pay annual rental of $290,000 starting at 1 January 2019. It is a four years lease with ultimate rental payment failing on 1 January 2022. At the end of lease term, STU Ltd has the option of purchasing the computer equipment for $20,000, and it is highly probable that STU Ltd will exercise such option. On the other hand, , STU Ltd will guarantee to Equipment Ltd a residue value of $160,000, Also, STU Ltd has to pay insurance cost, repair and maintenance expenditure on the computer equipment. Before the execution of lease, STU Ltd paid $16,500 as legal service fee and $32,500 to intermediates as negotiation of lease term and condition. The equipment has an expected useful life of 5 years, while STU Ltd purchase the computer equipment from the market, the cash price is $1,160,000 The market borrowing rate at commencement of lease is 11% b. Assume the lease is a finance lease, prepare journal entries of STU Ltd for the financial year ended 31 December 2019 (13 marks)
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