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Problem - Tom Ltd manufactures specialised moulding machinery for both sale and lease. Tom Ltd leased a moulding machinery to Smith Lid on 1 July 2019 for five years. The machinery has a fair value of $733,974 at the inception of the lease. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $100,000. There is a bargain purchase option that Smith Ltd will be able to exercise at the end of the fifth year for $150,000. There are to be five annual lease payments of $200,000, the first being made on 30 June 2020. Included within the $200,000 lease payments is an amount of $20,000 representing payment to the lessor for the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12%.
Required -
a) Prepare the minimum lease payment schedule for Smith Ltd for the first 3 years.
b) Prepare the journal entries in the books Smith Ltd for the years ending 30 June 2020 and 30 June 2021.
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