On 1 July 2018 XYZ Ltd leased a large item of machinery for 4 years with an up-front payment of $100,000 and payments of $250,000 being made at the end of each of the next four years. The rate of interest implicit in the lease is quoted as being 4%. There is no intention to seek an extension of the lease. Included within annual lease payments is an amount of $30,000 which the lessor is charging as part of a service contract to maintain the machinery. The economic life of the asset is assumed to be 8 years. The lessee has agreed to commit to a guaranteed residual value as part of the lease contract amounting to $120,000. 

a) Prepare the lease schedule to determine the interest expense and the reduction of principal in each year.

b) Prepare accounting journal entries for 1 July 2018 & 30 June 2021.

Answer rating: 100% (QA)

Year Opening balance Interest Total Installment Paid Closing Balance 01 July 2018 100115400 0 100115... View the full answer