Question
JK Ltd entered into a non-cancellable five-year lease agreement with Burt Ltd on 1 July 2019. The lease is for an item of machinery. The
JK Ltd entered into a non-cancellable five-year lease agreement with Burt Ltd on 1 July 2019. The lease is for an item of machinery. The lease's inception has a fair value of $647,192. The equipment is to be depreciated on a straight-line basis. The machinery is expected to have an economic life of six years, after which it will have an expected residual value of $105,000. There is a bargain purchase option that JK Ltd can exercise at the end of the fifth year for $140,000. There will be five annual payments of $175,000, the first being made on 30 June 2020. Included with $175,000 lease payments is $17,500, representing payment to the lessor for the insurance maintenance of the equipment.
a) Determine the interest rate implicit in the lease and calculate the present value of the lease payments.
b. Prepare the journal entries in the books of JK Ltd for the years ending 30 June 2020 and 30 June 2021.
c. Prepare the portion of the statement of financial position for the year ending 30 June 2021 relating to the lease asset and the lease liability. [5 marks]
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