Rex Ltd enters into a non-cancellable four-year lease agreement with Boing Ltd on 1 July 2021, the beginning of the financial year of both companies. The agreement is for leasing an aircraft that is expected to have an economic life of five years, after which time it will have no residual value. There is a bargain purchase option, which Rex Ltd will be able to exercise at the end of year four, for $20 000.

Boing Ltd is aircraft manufacture. The cost of the aircraft to Boing Ltd is $400 000. There are to be four annual payments of $125 000, the first being made on 30 June 2022. The aircraft is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 per cent.

Required

a) Calculate the present value of lease payments. Show the calculations. (2 Marks)

b) Prepare the journal entries in the books of Rex Ltd on 30 June 2022. (5 Marks)

c) Prepare the journal entries in the books of Boing on 1 July 2021. (4 Marks)