Harry Ltd enters into a non-cancellable five-year lease agreement with Porter Ltd on 1 July 2018. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192.

The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Harry Ltd will be able to exercise at the end of the fifth year for $140,000.

There are to be five annual payments of $175,000, the first being made on 30 June 2019. Included within the

$175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12%.

Required:

1. Prepare the minimum lease payment schedule for Harry Ltd for the first 3 years.

2. Prepare the journal entries in the books Harry Ltd for the years ending 30 June 2019 and 30 June 2020.

Using Australian Accounting System (AASB)