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 \(\$ 116,000\). The lease has a five-year term, end of year payment 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 \(20 \mathrm{X} 2\). Lu has a 31 December fiscal year-end. Prepare journal entries for the lease for \(20 \mathrm{X} 2\), including any entries relating to the asset.

3. Prepare the entry to record exercise of the bargain purchase option.