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On 1 July 2020 Mel Ltd leased a machine to Zed Ltd for 5 years. Zed Ltd pays $250 000 per year, in arrears. Thus the first payment occurs on 30 June 2021. Included in the $250 000 per year is a reimbursement for maintenance costs, amounting to $30 000 per year. The indicators show that the lease is a finance lease from Mel Ltds perspective. The useful life of the machine is 6 years. The machine will be returned to Mel Ltd after the lease term. Zed Ltd pays initial direct costs of $30 000. Mel Ltd pays initial direct costs of $20 000. The residual value of the machine after 5 years is $90 000 of which Mel Ltd guarantees $60 000 (guaranteed residual). The interest rate implicit in the lease is 5%. You may ignore tax. (Note PVIFA(n,i) = present value interest factor of an annuity of n payments of $1 where the interest rate between payments is i; PVIFL = present value interest factor of a lumpsum of $1 at the end of n periods, where the interest rate per period is i). Consider the present value of an annuity table and present value of a lumpsum table in the test folder.

1. Which of the following is correct:

a) The present value interest factor of an annuity of 5 payments in arrears at 5% is: 4.3295

b) The present value interest factor of a lumpsum at the end of 5 periods at an interest rate of 5% p.a. is : 0.7835

c) Both present value interest factors provided are correct

d) None of the answers are correct

2. Based on the scenario in question 8, which of the following is correct:

a) The lease payments consist of five payments of $250 000 plus the residual value of $90 000

b) The lease payments consist of five payments of $250 000 plus the guaranteed residual value of $60 000

c) The lease payments consist of five payments of $220 000 plus the residual value of $90 000

d) The lease payments consist of five payments of $220 000 plus the residual value of $60 000

3. Based on the scenario in question 8, the lessee will initially measure the lease liability at:

a) 250 000 x PVIFA(n=5, i=5%) + 90 000 x PVIFL(n=5, i=5%)

b) 250 000 x PVIFA(n=5, i=5%) + 60 000 x PVIFL(n=5, i=5%)

c) 220 000 x PVIFA(n=5, i=5%) + 90 000 x PVIFL(n=5, i=5%)

d) 220 000 x PVIFA(n=5, i=5%) + 60 000 x PVIFL(n=5, i=5%)

4. Based on the scenario in question 8, the lessee will initially measure the right-of-use asset at:

a) Initial value of the lease liability

b) Initial value of the lease liability plus $30 000 initial direct cost

c) Initial value of the lease liability plus $20 000 + $30 000 initial direct cost

d) None of the answers are correct