Question 4 (11 marks)

ABC Ltd entered into a five-year lease agreement with Brothers Ltd on 1 July 2023 for an item of machinery.

There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for $85 000. The machinery is expected to have a useful life of 7 years.

There are to be five annual payments of $105 000, the first being made on 30 June 2024. These payments include $8 000, representing payment to the lessor for insurance and maintenance of the equipment.

Additional information

Implicit interest rate: 11 per cent

Required:

Determine the initial measurement of the lease liability.

Provide the accounting journal entries for the year ended 30 June 2024

Show the details of all your calculations.