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Practical Question 1 - Leases Trump Ltd (Lessor) and Biden Ltd (Lessee) enter into a lease agreement for a tractor on 30 June 2019. On

Practical Question 1 - Leases

Trump Ltd (Lessor) and Biden Ltd (Lessee) enter into a lease agreement for a tractor on 30 June 2019. On that date, the tractor had a fair value of $150,486.

Details of the lease agreement are as follows:

Lease term

4 years

Annual Rental Payment in arrears starting from 30 June 2020

$42,000

Economic life of the Tractor

6 years

Estimated Residual value at the end of the lease term

$15,000

Residual Value guaranteed by the lessee

$10,000

Interest Rate implicit in the lease

6%

The annual rental payment includes $2,000 that is reimbursed to the lessor to do the maintenance and insurance for the tractor on behalf the lessee. The lessee intends to return the tractor to the lessor at the end of the lease term.

The relevant discount rates are:

Year

30/06/2019

1

30/06/2020

0.9434

30/06/2021

0.8900

30/06/2022

0.8396

30/06/2023

0.7921

Required:

1. Calculate the present value of the lease payments. (1 Mark)

2. Prepare the lease payment schedule for the lessee. (3 Marks)

3. Prepare journal entries in the books of the lessee from the start of the lease until the year ended 30 June 2021 (Narrations are not required). (6 Marks)

Note: Please round off to the nearest dollar.

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