Question 1

On 1 January 2020, Ray Ltd entered into a non-cancellable lease agreement to lease an equipment from Gray Ltd for 5 years. The contract requires Ray Ltd to make half yearly lease payments of $460,000 for 5 years, on 30 June and 31 December, each year commencing on 30 June 2020.

Included within the $460,000 half yearly lease payments, is an amount of $40,000 representing payment to Gray Ltd for the insurance and maintenance of equipment. The equipment is expected to have a useful life of 6 years, after which it is expected to have a salvage value of $750,000 (two-third of the residual value is guaranteed residual value). The equipment is to be depreciated on a straight-line basis. The interest rate implicit in the lease contract is 6% per annum. You are required to;

a) calculate the lease liability and lease asset for Ray Ltd

b) Prepare a full lease schedule for Ray ltd. showing the division of the lease rental into interest and principal components; and

c) Provide the journal entries for the lease transactions in the books of Ray ltd. for the financial year ending 31 December 2020