River Ltd enters into a non-cancellable lease agreement with Machinery Ltd on 1 January 2017. River Ltd’s financial year ends on 31 December. The lease consists of the following:

There are to be 5 annual payments of $90,000, the first being made on 31 December 2017. Included within the $90,000 lease payment is an amount of $10,000 representing payment to the Lessor Machinery Ltd for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

a) Verify the implicit rate of interest is correct against Fair Value.

b) Develop a table that shows the payment schedule to determine the interest expense for each year.

c) Prepare the journal entries for River Ltd. using the Net Method at the following date.

• 1/1/2017

• 31/12/2017

• 31/12/2018

Date of inception: 1/1/2017 5 years 6 years Duration of lease: Life of leased asset: $40,000 Guaranteed residual value (Added to final payment): Implicit rate of interest: Fair value at the inception of the lease 8% $346,640