On 1 July 20x2, Large Mart (as the lessor) signs a four (4) year "Retailer/Dealer Lease" lease contract for a photo copier with Customer Ltd. (as the lessee). Customer Ltd is able to cancel the lease contract at any time by paying a $100 administration fee. Large Mart expects that the useful life of the photo copier is four (4) years.

The lease contract requires Customer Ltd to make the following payments to Large Mart: $500 (paid in cash) when the contract is signed (1 July 20x2), and $1,500 at the end of each year (30 June) during the lease term. Customer Ltd. is able to purchase the photo copier at the end of the lease term (the end of year 4) for a price of $500, which is substantially above the expected market value of the photo copier at that time (which is zero). The Large Mart accounting department has determined that the interest rate implicit in the lease is 10%. Customer Ltd. has leased the photo copier from Large Mart (instead of purchasing it) because the sales price of the photo copier at the time the lease contract was signed was $6,000 and Customer Ltd. did not have sufficient cash to purchase the photo copier directly.

Prior to the signing of the lease contract, the photo copier was part of the Large Mart "Inventory Trade/Sales" account, and in that account it had a value of $4,000.

Required:

a) Calculate the present value of the unavoidable lease payments Large Mart will receive from Customer Ltd. (2 marks)

b) Determine if Large Mart should treat this lease as a finance lease or an operating lease, and provide a DETAILED explanation for your decision (2 marks)

c) Provide all journal entries that are necessary in the books of Large Mart to account for the signing of the lease contract (if any are necessary), AND provide a detailed explanation that summarises the issues that must be considered in the creation of these journal entries (if any are necessary) (5 marks)