Question 4 Equipment Ltd leased new advanced computer equipment to STU Ltd on 1 January 2019. STU Ltd has to pay annual rental of $290,000 starting at 1 January 2019. It is a four years lease with ultimate rental payment failing on 1 January 2022. At the end of lease term, STU Ltd has the option of purchasing the computer equipment for $20,000, and it is highly probable that STU Ltd will exercise such option. On the other hand, , STU Ltd will guarantee to Equipment Ltd a residue value of $160,000, Also, STU Ltd has to pay insurance cost, repair and maintenance expenditure on the computer equipment. Before the execution of lease, STU Ltd paid $16,500 as legal service fee and $32,500 to intermediates as negotiation of lease term and condition.

The equipment has an expected useful life of 5 years, while STU Ltd purchase the computer equipment from the market, the cash price is $1,160,000

The market borrowing rate at commencement of lease is 11%

Required

a. In Equipment Ltds point of view, explain and determine whether the above arrangement is finance or operating lease. (4 marks)

b. Assume the lease is a finance lease, prepare journal entries of STU Ltd for the financial year ended 31 December 2019 (13 marks)

c. Prepare the extract of Statement of profit or loss and other comprehensive income and Statement of Financial Position to report the lease for Equipment Ltd for the financial year ended 31 December 2019 (3 marks)