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On January 1, 2020, PQR Ltd entered into a two year lease for a truck. The contract contains an option to extend the lease term for a further one year. PQR Ltd believes that it is reasonably certain to exercise this option. The trucks have a useful economic life of ten years.
Lease payments are $10,000 per year for the initial term and $15,000 per year for the option period. All payments are due at the end of each year. To obtain the lease, PQR Ltd incurs initial direct costs of $5,000. PQR Ltd's incremental rate of borrowing is 7%.
Required
Problem 1: Calculate the initial carrying amount of the lease liability and the right of use asset and provide the double entries needed to record these amounts in PQR Ltd's financial records.
Problem 2: State the main criteria to determine leasing arrangement as finance lease
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