Exercise 10.11FINANCE LEASE LESSEE

Indiana Ltd decided to lease from Jones Ltd a motor vehicle that had a fair value at 30 June 2016 of $38 960. The lease agreement contained the following provisions.

Lease term (non-cancellable)3 yearsAnnual rental payments (commencing 30/6/16)$11 200Guaranteed residual value (expected fair value at end of lease term)$12000Extra rental per annum if the car is used outside the metropolitan area$1000

The expected useful life of the vehicle is 5 years. At the end of the 3-year lease term, the car was returned to the lessor, which sold it for $10 000. The annual rental payments include an amount of $1200 to cover the cost of maintenance and insurance arranged and paid for by the lessor. The car was used outside the metropolitan area in the 201718 year. The lease is considered to be a finance lease.

Required

1. Prepare the journal entries for Indiana Ltd from 30 June 2016 to 30 June 2019.
2. How would your answer to requirement 1 change if the guaranteed residual value was only $10 000, and the expected fair value at the end of the lease term was $12 000?