Question - Lessee Amortization Table; Entries:
Lu Limited is expanding and needs more manufacturing equipment. The company has been offered a lease contract for equipment with a fair value of $130,000. The lease has a five-year term, with beginning-of-year payments. The lease is renewable for a further two years at the option of the lessee. Annual rental for the first term is $28,600, for the second, $11,500. Payments are made each 31 December. The first term rental includes $2,600 for maintenance and insurance, the second, $1,500. Lease payments are close to market lease rates for both the first and second terms. At the end of the second term, Lu can buy the asset for $1. The machinery has an expected life of 10 years. Lu Limited has an incremental borrowing rate of 10%. Lu has been told that the interest rate implicit in Lease 1 is 8%.
Required:
1. Prepare an amortization table for the lease.
2. Assume that the lease was entered into on 1 January 20X2. Lu has a 31 December fiscal year-end. Prepare journal entries for the lease for 20X2, including any entries relating to the asset.
3. Prepare the entry or entries necessary on 31 December 20X9, assuming Lu Limited exercises the bargain purchase option.