THREE: Leases (Total: 12 marks) PART A Lord Ltd owns and operates one (1) high-grade coal producing mine in Western Australia and one (1) average-grade coal producing mine in Queensland. Lord Ltd (Supplier) enters into a three (3) year contract with Bill Ltd (Customer) where Bill Ltd will purchase all the coal produced by Lord Ltd's coal mine in Western Australia. The contract between Bill Ltd and Lord Ltd contains the following terms: Lord Ltd can only supply the coal from the high-grade coal producing mine in Western Australia Lord Ltd must supply the agreed quantity at scheduled dates throughout the period of the contract and this quantity and scheduled dates cannot be changed unless there are exceptional circumstances like a flood. Lord Ltd constructed the mine, and also operates and maintains the mine on a daily basis. Bill Ltd was not involved in the design, or in the construction of the coal mine. The coal mine has been operating for the last 5 years. 3.1 In accordance with AASB 16 Leases, should the contract between Lord Ltd Ltd and Bill Ltd be treated as a lease contract in Bill Ltd.'s books? Explain your reasoning. (4 marks) PART B On 1 July 2020, Fordham Ltd enters into a four (4) year contract with Lengxi Ltd to lease a large item of machinery. Fordham Ltd intends to return the lease asset at the end of the lease term. The following information is provided: Lease term (non-cancellable) Expected useful life of the leased machinery Expected salvage value at the end of useful life Guaranteed residual value at the end of the lease term Expected fair value at the end of the lease term Net initial directly attributable costs, paid 1 July 2020 Annual lease payments, commencing 1 July 2020 Annual maintenance & insurance included in lease payments Interest rate implicit in the lease 3.2 Calculate the Lease Liability and the Right-of Use on 1 July 2020. 4 years 7 years $120,000 $260,000 $280,000 $ 30,000 $170,000 $20,000 10% p.a. (2 marks) 3.3 In the table below, list the items and dollar amounts pertaining to the above lease contract that should be included in the Balance Sheet of Fordham Ltd (the lessee) for the year ended 30 June 2022. Ignore any cash impact. (3 marks) 3.4 Prepare journal entries related to the above lease contract in the books of Fordham Ltd (the lessee) for the year ended 30 June 2022