On January 1, 2015, Tsunami company leased a wind-generating device from Long Vuong company for 4 years.

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Question:

On January 1, 2015, Tsunami company leased a wind-generating device from Long Vuong company for 4 years. This device was acquired by Long Vuong Company with a fair value of CU1,300,000. The terms of the lease are as follows:  Tsunami Company has the right to decide how to use this device for the duration of the lease period.  At the end of the lease term, Tsunami company has the right to extend the lease for additional 2 years.  At the end of each fiscal year (December 31), Tsunami Company is responsible for paying Long Vuong company of CU400,000. This payment will be adjusted at the inflation rate each 2 years.  The residual value of this device is estimated CU200,000 at the end of fourth year, and is insignificant at the end of sixth years. The Tsunami Company has no responsibility to guarantee this residual value. To sign this lease contract:  Tsunami Company paid the consultancy fee of CU100,000 in cash.  Long Vuong Company paid to the broker CU150,000 in cash. Additional information:  At the date of signing the lease, Tsunami company believes that the lease renewal is not necessary, as the company will have to use this device with greater capacity to suit the market requirement in future. In addition, in the market there are also new suppliers appearing with better technology such as Atlantic company, Pacific company.  If Tsunami company does not sign the lease, Tsunami company can borrow CU1.3 million with the proposed interest rate of 25% from the bank. This interest rate is 12% higher than the company’s average cost of capital. Therefore, the board of directors of Tsunami Company decided not to borrow.  According to World Bank forecasts, Vietnam's inflation rate in 2015, 2016, 2017, and 2018 averaged 6%.

Required:

1. Calculate the interest rate implicit in this lease contract.

2. Assuming the lease contract’s interest rate is 9% each year, determine liability and right-touse and present how to account this lease contract on January 1, 2015.

3. Prepare all journal entries related to this lease contract on December 31, 2015.