Burt Ltd enters into a non-cancellable 6-years lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $994,576.

The machinery is expected to have an economic life of 7 years, after which time it will have an expected residual value of $290,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 6^thyear for $230,000.

There are to be 6 annual payments of $300,000, the first being made on 30 June 2024. Included within the $300,000 lease payments is an amount of $40,000 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 lease payments.

In this question the implicit rate is (percent):

Proof (Enter the proof in the table below)

Description	Calculation	Total
Periodic lease payments
Bargain purchase option
Fair value at lease inception

b) Prepare the journal entries in the books of Burt Ltd at the start of the agreement and for the years ending 30 June 2024 and 30 June 2025.

1^st July 2023

Debit/Credit	Description	Debit Amount	Credit Amount

30^th June 2024

Debit/Credit	Description	Debit Amount	Credit Amount

30^th June 2025

Debit/Credit	Description	Debit Amount	Credit Amount

c) Prepare the portion of the statement of financial position for the year ending 30 June 2024 and 2025 relating to the lease asset and lease liability.

Assets

Description	30th June 2024	30th June 2025
Non-current Assets

Liabilities

Description	30th June 2024	30th June 2025
Current Liabilities
Lease Liability
Non-current Liabilities
Lease Liability

Answer rating: 100% (QA)

Formula Working A B D E G 1 I Implicit rate is the rate at which fair value of the asset will be equ... View the full answer