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Determine the interest rate implicit in the lease

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Reference no: EM132972293

Question - Kim Ltd, a company that manufactures, sells, and leases cranes, has entered into an agreement to lease a crane to Annie Ltd. The crane cost Kim Ltd $70,000 to make and has a fair value of $75,400 on 1 July 2018. The lease agreement details are as follows:

Lease term: 3 years

Commencement date: 1 July 2018

Lease payments:

At lease inception: $ 20,000

Annual lease payments commencing 30 June 2019: $ 20,000

Fair value of the machinery at 1 July 2018: $ 75,400

Estimated economic life of the machinery: 5 years

Estimated residual value of the machinery at the end of its economic life: $ 1,000

Residual value at the end of the lease term: $ 10,000

Residual value guaranteed by Annie Ltd: $ 6,000

Included in the annual lease payments is an amount of $2,000 payable to Kim Ltd for insurance and maintenance of the machinery. The lease is cancellable, but a penalty of 50% of the total lease payments is payable on cancellation and Annie Ltd would need to enter into a new lease with Kim Ltd. Annie Ltd does not intend to take ownership of the machinery at the end of the lease term. Kim Ltd had legal fees of $1,110 associated with preparing the lease agreement.

Required -

(a) Determine the interest rate implicit in the above lease.

(b) For Annie Ltd, prepare schedule of lease payments and show the journal entries for the year ended 30 June 2019.

(c) For Kim Ltd, prepare schedule of lease receipts and show the journal entries for the year ended 30 June 2019.

Reference no: EM132972293

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