Question: On 1 July 2018, Red Ltd entered into a non-cancellable lease contract to lease office equipment from Black Ltd for six years. The lease contract requires Red Ltd to make lease payments of $150,000 for 6 years, on 30 June and 31 December, each year, commencing on 31 December 2018. Included within the $150,000 half-yearly lease payments, is an amount of $20,000 representing payment to Black Ltd for the insurance and maintenance of the equipment. Red Ltd paid $15,000 for initial direct cost associated with the lease contract. The lease contract provides that Red Ltd fully guarantees the residual value of the equipment, $220,000. The office equipment will be transferred to Red Ltd when this payment is made. The interest rate implicit in the lease contract is 6% per annum. Black Ltd manufactured the office equipment leased to Red Ltd, at a cost of $1,000,000. The equipment is expected to have a useful life of 7 years, after which time it is expected to have a residual value of $80,000. The equipment will be depreciated on a straight-line basis.
Required:
Q1) Provide a schedule of lease payments for Red Ltd, for the period from lease inception to the end of the agreement.
Q2) Provide all journal entries relevant to the lease contract in the accounts of Red Ltd i) At inception of the lease (1/7/2018) ii) As at 31/12/2018, including depreciation charges. iii) At the end of the lease contract, including the depreciation charges.
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