On 1 July 2018, Louis Ltd entered into an 8-year contract to lease a ship for its salvage business. When negotiating the lease contract, on 1 July 2018, Louis Ltd paid direct costs of $18,000 for engineering advice.

The lease contract requires Louis Ltd to make 8 annual lease payments of $80,000, with the first payment due on 30 June 2019. The lease contract includes a guaranteed residual of $130,000, which is payable by Louis Ltd at the end of the lease contract.

The ship is expected provide equal benefits each year of its expected useful life of 12 years, after which it will have a scrap value of $50,000.

The implicit interest rate in the lease contract is 7% per annum. The relevant present values are:

Interest Rate	Present Value of $1 in 8 years	Present Value of an annuity of $1 for 8 years
7%	0.5820	5.9713

REQUIRED:

1. Prepare a schedule of lease payments for Louis Ltd for the financial years ending 30 June 2019 and 30 June 2020, showing lease payments, interest expense, principal reduction, and outstanding lease liability. Show all workings necessary to derive your answer. (5 marks)

ANSWER:

1. Provide the journal entries for Louis Ltd relating to the lease contract for the financial year ending 30 June 2019, in accordance with AASB16 Leases. (5 marks)

ANSWER: