Week 8 Question 3 (10 marks)

FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following: Date of inception: 1/1/15 Duration of lease: 4 years Life of leased asset: 5 years Lease payments (annual): $550 000 (annual) which includes $80 000 for Maintenance and insurance costs per annum. Guaranteed residual value (Added to final payment): $190 000 Interest rate: 7%

Formula for PV of $1 in n periods =1/(1+k)n Formula for present value of annuity of $1 per period for n periods =(1-1) / (1+k)n / k where, k is the discount rate expressed in decimal

Required: a) Determine the present value of minimum lease rental payment. (5 Marks)

b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following; (5 Marks) i. Transfer of control

ii. Payment of annual payments for 2015 and 2016.