On 1 July 20x2, Large Mart signs a four (4) year non-cancellable lease contract for a photo copier for its office. At the end of the lease period Large Mart will have the option to purchase the photo copier for $100 (but the expected fair value of the photo copier at the end of the lease term is $500). As a result, Large Mart is planning to exercise the purchase option in the lease contract. Large Mart expects that the useful life of the photo copier is five (5) years. The lease contract requires Large Mart to make the following payments: $1,000 when the contract is signed (1 July 20x2), and $3,000 at the end of each year (30 June) during the lease term. The Large Mart accounting department has determined that the interest rate implicit in the lease is 10%. Large Mart leased the photo copier (instead of purchasing it) because the price of the photo copier at the time the lease contract was signed was $10,577.90 and Large Mart did not have sufficient cash to purchase the photo copier directly. Required: 

a) Calculate the present value of the minimum lease payments, and explain your calculations (2 marks) 

b) Determine if the lease is a finance lease or an operating lease, and provide a DETAILED explanation for your decision (2 marks) 

c) Provide all journal entries that are necessary in the books of Large Mart to account for the signing of the lease contract AND all lease payments that Large Mart makes during the financial year ended 30 June 20x3, AND provide an outline of all required

Answer rating: 100% (QA)

Solution a Calculate the present value of the minimum lease payments The present value of the minimum lease payments can be calculated using the formula Present Value Total Lease Payments 1 Interest R... View the full answer