Phonefun Limited signed a contract with Telecomy Leasing Co on 1 January 2023 to lease a machine. The agreement consists in 10 equal annual payments of $300,000 at the beginning of each year with an interest rate of 15%. The yearly rental payment includes $30,000 of executory costs related to insurance on the machine. The executory costs of $30,000 are paid to the lessor each year. There is an option to purchase the machine at the end of the lease term for $50,000. The machine has an estimated useful life of 14 years and a guaranteed residual value of $20,000. Both companies adopt straight-line depreciation method for all items of PPE. Consider a PVIF (n=10, i=15%) of 0.2472 and PVIFA (n=10, i=15%) of 5.0188. The balance day for both companies is 31 of December.

Required 

1. Discuss the nature of this lease to Phonefun Limited.
2. Discuss the nature of this lease to Telecomy Leasing Co.
3. Calculate the present value of the minimum lease payment.
4. Prepare the journal entries for Phonefun Limited in 2023 and 2024.
5. Prepare the journal entries for Telecomy Leasing Co in 2023 and 2024.

Answer rating: 100% (QA)

1 The nature of the lease to Phonefun Limited is a finance lease A finance lease is a type of lease agreement where the lessee Phonefun Limited effectively assumes the risks and rewards of ownership o... View the full answer