Reference no: EM132551530

On 1 July 2016, Endeavour Ltd entered into a five-year lease agreement with Fast Finance Ltd for an item of machinery. The lease agreement requires Endeavour Ltd to make five annual lease payments of $15,000 per year paid at the beginning of each year (in advance: annuity due) on 1 July with the first payment on 1 July 2016.

At the end of the lease term, Endeavour Ltd will return the item of machinery to Fast Finance Ltd. The item of machinery will then be sold by Fast Finance Ltd. The residual value of the item of machinery at the end of the lease term is $10,000 of which $7,500 has been guaranteed by Endeavour Ltd. At the commencement of the lease, Endeavour Ltd estimates that, at the end of the lease term, the item of machinery will realise $12,000 when it is sold.

The interest rate implicit in the lease is not readily determinable. Endeavour Ltd's incremental borrowing rate is 5% per annum which reflects the fixed rate at which Endeavour Ltd could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a five-year term, and with similar collateral.

Required

Question (a) Determine the amounts at which Endeavour Ltd would recognise the right-ofuse asset and the lease liability on 1 July 2016.

Question (b) Explain the term 'initial direct costs' and how Endeavour Ltd would account for such costs.

Question (c) Prepare the journal entries to account for the lease by Endeavour Ltd between 1 July 2016 and 1 July 2017.

Question (d) On 30 June 2018, Endeavour Ltd revises its estimate of the amount that the item of machinery is expected to realise when it is sold at the end of the lease term. How would Endeavour Ltd account for a revised amount of $5,000? What if the revised amount was $9,000?