ransaction$2$:

Large Mart signed another lease contract on the $3$ June $201$X$.$ This lease contract is for a photocopy

machine. The lease contract is signed between Office Works and Large Mart. Office Works will

provide the photocopy machine to Large Mart for a period of $3$ years and in return Large Mart will

pay Office Works $$1,500$ at the end of each year. In addition, the lease contract requires Large Mart

to make a payment of $$1,000$ on the day the contract is signed. The contract also includes a clause

that allows Large Mart to cancel the agreement at any time during the lease period. However,

should the lease be cancelled Large Mart will have to pay an administration fee of $$100$ to Office

Works.

The photocopy machine is delivered and installed on the $3$ June. Large Mart estimates that the

photocopy machine will have a useful live of $6$ years. At the end of the lease term Large Mart is

planning to return the photocopy machine to Office Works.

Before the lease contract was signed, Large Mart also considered purchasing the photocopy machine

instead of leasing it$.$ However, the photocopy machine would have cost $$5,000$ and at the moment

Large Mart does not want to spend this much money on equipment.

The finance department of Large Mart has assessed the lease contract and determined that the

interest rate that is implicit in the lease amounts to $14\%$

IMPORTANT NOTE: Large Mart has elected to use the exemption rules outlined in AASB $16,$

paragraphs $5-8$ for all low value and short term leases.

Required:

$1.$ Determine if the lease described in transaction $2$ is a finance lease or an operating lease $($use

the leasing decision work sheet to make this choice$)$

$2.$ Provide all journal entries that are necessary to account for the signing of the lease contract,

the delivery of the photocopy machine and the initial payment that is made by Large Mart

$3.$ Determine if it is necessary to add the photocopy machine to the depreciation schedule and

calculate the depreciation for the month on June $($if necessary$)$

$4.$ Use the work sheet provided below to outline all journal entries that will be necessary to

record the lease payment that will be required at the end of the first year of the lease

contract $($but do NOT record in the current year general journal$)$