Question 1 - Lease (20 marks)

On 1 April 2019, Brilliant Ltd leased an equipment to Smart Ltd. The lease agreement is non-cancellable with a lease term of three years. The equipment is expected to have an economic life of five years, after which time it will have an expected salvage value of $30,000. There are to be three annual payments of $125,000, the first to be made on 31 March 2020 (i.e. at the end of the year). Included in the $125,000 is $5,000 representing payment for insurance and maintenance. The interest rate implicit in the lease is 7%. The fair value of the equipment at the inception of the lease is $314,918. Smart Ltd intends to return the equipment to Brilliant Ltd at the end of the lease term. Assume straight line depreciation is used for depreciation of the leased equipment. Required:

a) Prepare lease payment schedule for Smart Ltd (show all workings) (4 marks) b) Record the relevant journal entries for Smart Ltd relating for 1 April 2019 and for the year ending 31 March 2020. (7 marks) c) Show extracts of the financial position for the leased asset and liability for Smart Ltd for the year ending 31 March 2020. (4 marks) d) If Smart Ltd decides to take over the ownership of the leased equipment at the end of the lease term, explain the effect of this arrangement on the net profit of Smart Ltd, in comparison to the arrangement in which the leased asset is returned to Brilliant Ltd. (5 marks)