Question:

ABC Ltd has entered into an agreement to lease an item of equipment that produces teddy bears. The terms of the lease are as follows:

Date of entering lease: 1 July 2023.

Duration of lease: 10 years.

Life of leased asset: 10 years.

There is no residual value.

Lease payments: $5000 at lease inception, $5500 on 30 June each year (that is, 10 payments).

Included within the lease payments are executory costs of $500.

Fair value of the machine at lease inception: $27 470.

Required:

Determine the interest rate implicit in the lease.