Question 4 (11 marks)

FABS Ltd acquired an item of equipment and entered into a non-cancellable lease agreement with MBC Equipment Ltd on 1 January 2019. The lease consists of the following:

• Date of inception: 1/1/19
• Duration of lease: 5 years
• Life of leased asset: 6 years
• Lease payments (annual): $250,000 (annual) which includes $30,000 for maintenance and insurance costs per annum.
• Guaranteed residual value

(Added to final payment): $70,000

• Interest rate: 14%

Required:

1. Determine the present value of minimum lease rental payment. (2 Marks)
2. Prepare the journal entries for FABS (the Lessee) using the Net Method for the following (6 marks)

1. Transfer of control
2. Payment of annual payments for 2019 and 2020.

3. In your own words, explain how do we account for service costs that are included within a contract to lease an asset? (3 marks)