On 1 January 20X1, L Leasing Pte Ltd ("LLL") and M Manufacturing Pte Ltd ("MMM") enter into a lease agreement. LLL leases a piece of standard electronic equipment to MMM, which is to be placed and used in MMM's factory for MMM's manufacturing of the goods.

The following relevant information are provided:

i. The equipment has a fair value (also the cost of asset to LLL) of $100,000, and an economic life of 5 years with no residual value at the end of its economic useful life.

ii. The agreement provides for a non-cancellable lease term of 2 years, after which MMM has the option to purchase the equipment at $10,000. Its estimated market value then is expected to be $50,000.

iii. LLL's implicit rate of return on this lease transaction is 10% per annum.

iv. MMM's incremental borrowing rate is 11%. MMM is not aware of LLL's cost and the implicit interest rate in relation to the lease.

v. The annual lease payments, are paid by MMM to LLL on 31 December 20X1 and 31 December 20X2.

Both LLL and MMM have 31 December accounting year-ends, and use the straight line method for depreciation and effective interest method for amortisation. Round your answers to the nearest dollar.

Required:

(a) Does a lease arrangement exist?

(b) How will LLL price the lease, i.e. compute the annual lease payments, under this arrangement? Round your answer to the nearest dollar. (Partial Answer Key: Fixed Lease Payment = ~$52,857)

(c) Apply FRS 116 Leases and illustrate the accounting in MMM's books by preparing the necessary journal entries for 20X1 and 20X2. Show all workings.

(d) Apply FRS 116 Leases and illustrate the accounting in LLL's books by preparing the necessary journal entries for 20X1 and 20X2. Show all workings.

(e) Using the information from (a) to (d) above, but now, assume that MMM is given an option to purchase the equipment at the end of the two-year lease for $50,000. How will LLL price the lease? Also, apply FRS 116 Leases and illustrate the accounting in LLL'sbooks by preparing the necessary journal entries for 20X1 and 20X2. Show all workings.(Partial Answer Key: Fixed Lease Payment = ~$33,810)