Burt Ltd enters into a non-cancellable five-year lease agreement with Earnie Ltd on 1 July 2015. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1294384. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the fifth year for $280000.There are to be five annual payments of $350000, the first being made on 30 June 2016. Included within the $350000 lease payments is an amount of $35000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.
REQUIRED
(a) Determine the rate of interest implicit in the lease and calculate the present value of the minimum lease payments.
(b) Prepare the journal entries in the books of Burt Ltd for the years ending 30 June 2016 and 30 June 2017.
(c) Prepare the portion of the statement of financial position for the year ending 30 June 2017 relating to the lease asset and lease liability.
(d) Prepare the journal entries of Burt Ltd for the years ending 30 June 2016 and 30 June 2017 assuming that Burt Ltd classifies the lease as an operating lease.