Cherry Ltd entered into a non-cancellable three year lease agreement with Mango Ltd on 1 July 2022. The machinery cost Mango Ltd $140,000 to manufacture and at the inception of the lease, it had a fair value of $192,094. This machinery is expected to have a useful life of four years, after which it will have a salvage value of $28,000. Cherry Ltd made an initial payment of $75,000 upon signing the lease agreement with three annual lease payments of $38,000 to follow, with the first being made on 30 June 2023. Included in the three annual lease payments is an amount of $3,000 representing payment to the lessor for the insurance and maintenance of the equipment. The residual value at the end of the lease term is $40,000 and the lessee has guaranteed $20,000. Cherry Ltd intends to return the machinery to Mango Ltd at the end of the lease term.

Required:

A. Prepare the lease payments schedule for Cherry Ltd using the interest rate implicit in the lease of 10%. Show all workings and round off to the nearest dollar. (10 marks)

B. Prepare the journal entries for Cherry Ltd for the full year from 1 July 2022 to 30 June 2023. (10 marks)

Answer rating: 100% (QA)

A Lease Payments Schedule for Cherry Ltd To calculate the lease payments schedule we need to find th... View the full answer