On $1$ January $20$X$1,$ Co$.$ LE entered into a contract to lease an equipment from LO

Leasing Ltd$.$ The selling price of the equipment was $$40,000.$

The terms of the agreement included:

$1.$ Co$.$ LE determines when, where and which goods are to be produced using the

equipment, which is in its factory premise. If the equipment needs to be serviced

or repaired, LO Leasing Ltd is required to substitute an equipment of the same

type. Otherwise, and other than on default by Co$.$ LE$,$ LO Leasing Ltd cannot

retrieve the equipment during the lease term.

$2.$ Non$-$cancellable lease term of $4$ years

$3.$ Yearly lease payment of $$10,000$ to be paid by Co$.$ LE on $31$ December of each

year, commencing $31$ December $20$X$1$

$4.$ Co$.$ LE guaranteed to LO Leasing Ltd that the right$-$of$-$use asset would have a

residual value of $$5,000$ when the asset was returned to the lessor at the end of

the lease on $31$ December $20$X$4.$ Co$.$ LE expected the equipment to have a

residual value of $$2,000.$

The rate of return of the lease was $5\%.$

On $1$ January $20$X$1,$ the equipment was new with an expected estimated useful life

of $5$ years. Assume Co$.$ LE uses a cost model with straight$-$line depreciation.