On 1 July 20x2, Large Mart (as the lessor) signs a three (3) year 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 Large Mart a $20 administration fee. Large Mart expects that the useful life of the photo copier is eight (8) years. The lease contract requires Customer Ltd to make the following payments (via bank transfer) to Large Mart: $2,000 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 3) for a price of $6,000, which is above the expected market value of the photo copier at that time (which is $5,000). 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 $10,000 and Customer Ltd. did not have sufficient cash to purchase the photo copier directly.

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. (3 marks)

C) Provide all journal entries that are necessary in the books of Large Mart to account for all lease payments made during the years ending 30 June 20x3, AND 30 June 20x4. (4 marks)