WQ3: (Question 3 E1A)

. Assume Shrek Ltd (lessee) has entered into a leasing arrangement with Fairy Ltd (lessor) for a (new) treadmill for staff to use in its headoffice.

The lease is for 3 years and commences on the 1 March 2020.

There are 6 payments of $570 payable in advance each 6 months with the first payment of $570 payable on 1 March 2020, the next 1 September 2020

The treadmill has an estimated economic life of 4 years, with a residual value of zero at the end of its economic life.

The fair value of the treadmill at the commencement of the lease is $3,400.

The residual value at the end of the lease term is $700. Shrek Ltd has guaranteed half of the residual value at the end of the lease term.

There is no purchase option.

Shrek Ltd will return the equipment to the lessor at the end of the lease term.

It is expected that Shrek Ltd will not be required to pay any of the guaranteed residual value at the end of the lease.

Shrek Ltd has elected to apply the recognition exemption in para of AASB 16.

Required: A. Prepare the journal entries to account for this lease in the book of the lessee for the years ending 30 June 2020 and 30 June 2021. Show all dates and calculations.