Smart Tech. entered into a five-year lease agreement with Allens Ltd, on 1 July 2019. The lease is for a number of spa baths. Allens Ltd acquired the spa baths on 1 July 2019, at the fair value of $1,009,850. Smart Tech. uses the spa baths at a club. The baths are expected to have an economic life of seven years, after which time they will have no residual value. There is a bargain purchase option that Smart Techs will be able to, and is expected to, exercise at the end of the fifth year, for $100,000.

There are to be five annual payments of $250,000, due at the end of each fiscal year (i.e., on 30 June each year). Smart Tech. is responsible for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The interest rate implicit in the lease is 10% per year. The lease can be cancelled by Smart Tech. upon payment of a penalty of $700,000.

REQUIRED:

(1) What type of lease is this for Allens Ltd? Provide justifications for your classification considering the criteria in AASB 16 Leases. (5 marks)

(2) Prepare the journal entries, including narrations, for Allens Ltd from 1 July 2019 to 30 June 2020 to record the lease arrangement consistent with AASB 16 Leases. (7 marks)

(3) For Smart Tech. the contract contains a lease. Prepare the journal entries, including narrations, for Smart Tech. from 1 July 2019 to 30 June 2020 to record the lease arrangement consistent with AASB 16 Leases. (8 marks)

Annuity tables and present value tables are provided below

Present value interest factor of $1 per period at i% for n periods, PVIF(i.). Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 1 0.990 0.9800.971 0.962 0.952 0.9430.935 0.926 0.917 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 3 0.971 0.942 | 0.915 0.889 0.864 0.840 0.816 0.794 0.772 4 0.961 0.924 0.888 | 0.855 0.823 | 0.792 | 0.763 0.735 0.708 5 0.951 0.906 0.863 0.822 0.784 | 0.747 | 0.713 0.681 0.650 6 0.942 0.888 0.837 0.790 0.746 0.705 0.6660.630 0.596 70 .933 0.871 0.813 0.760 0.711 0.665 0.623 0.5830.547 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 10 0.905 | 0.820 0.744 0.676 0.614 | 0.558 | 0.508 0.463 0.422 110.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 120.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 130.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 140.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 16 0.853 0.7280.623 0.534 0.458 0.394 0.339 0.292 0.252 17 0.844 0.714 0.605 | 0.513 0.436 | 0.371 | 0.317 | 0.270 0.231 180.836 0.7000.587 0.494 0.416 0.350 0.296 0.250 0.212 190.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 20 | 0.820 0.673 0.554 | 0.456 | 0.377 | 0.312 | 0.258 | 0.215 0.178 25 0.780 0.610 0.478 | 0.375 0.295 | 0.233 | 0.184 0.146 0.116 30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 350.706 0.500 0.355 0.253 0.181 0.130 0.094 0.068 0.049 400.672 0.453 0.307 0.208 0.142 0.097 0.067 0.046 0.032 50 0.608 0.372 0.228 0.141 0.087 0.054 0.034 0.021 0.013 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.7180.706 0.694 0.751 0.731 0.712 0.693 0.675 0,658 0.641 0.624 0.609 0 593 0 579 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.3140.296 0.279 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.2090.194 0.386 0.352 0.322 0.295 0.270 | 0.247 | 0.227 | 0.208 0.191 | 0.176 0.162 0.350 0.317 0.2870.261 0.237 0.215 0.1950.178 0.162 0.148 0.135 0.319 0.286 0.2570.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.263 0.232 0.205 0.1810.160 0.141 0.125 0.111 0.099 0.088 0.078 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.18 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0,052 0.045 0.1800.153 0.1300.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0,026 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.0160.013 0.010 0.057 0.044 0.033 0.026 0.0200.015 0.012 0.009 0.007 0.005 0.004 0.036 0.026 0.019 0.014 0.010 0.008 0.006 0.0040.003 0.002 0.002 0.022 0.015 0.0110.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.009 0.005 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 Present value interest factor of an (ordinary) annuity of $1 per period at i% for n periods, PVIFA(in). Period 1% 2% 3% I 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.9742.914 2.855 2.798 2.743 2.690 2.639 2.589 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.1993.127 3.058 2.991 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.4864.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 7.652 7.3257.020 6.733 6.463 6.210 5.971 5.7475.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 9.471 8.983 8.530 8.111 7.722 7.360 7.0246.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 | 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.0294.836 4.656 4.486 4.327 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.5367.161 | 6.814 6.492 6.1945.918 5.660 5.421 5.1974.988 4.793 4.611 4.439 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 | 13.004 12.106 | 11.296 | 10.563 | 9.899 9.295 | 8.745 8.244 | 7.786 | 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 13.865 12.849 11.938 11.11810.380 9.712 9.108 8.559 8.061 7.606 7.1916.811 6.462 6.142 5.847 5.575 5.324 5.092 4.8764.675 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.9746.604 6.265 5.9545.668 5.405 5.162 4.938 4.730 17 | 15.562 | 14.292 | 13.166 | 12.166 | 11.274 | 10.477 | 9.763 9.122 | 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 | 5.475 | 5.222 4.990 4.775 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.7568.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 1917.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.8397.3666.938 6.550 6.1985.877 5.584 5.316 5.070 4.843 2018.046 16.351 14.877 13.590 12.462 11.470 10.594 | 9.818 9.129 8.514 7.963 7.469 | 7.025 6.623 6.259 | 5.929 | 5.628 5.353 | 5.101 4.870 25 | 22.023 19.523 17.413 15.622 14.094 | 12.783 11.654 | 10.6750 9.823 | 9.077 8.422 7.843 7.330 6.873 6.464 | 6.097 | 5.766 5.467 5.195 | 4.948 30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 35 29.409 24.999 21.487 18.665 16.374 14.498 12.948 11.655 10.567 9.644 8.855 8.1767.586 7.070 6.617 6.215 5.858 5.539 5.251 4.992 40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 50 39.196 31.424 25.730 21.482 18.256 15.762 13.801 | 12.233 10.962 9.915 9.042 8.304 7.675 7.133 6.661 6.246 5.880 5.554 5.262 4.999