Question

This question has FIVE parts. (a) (b), (c), (d) and (e). 

Use the information here for answering part (a) to (e) on this page. 

Thomas Ltd enters into a five-year lease agreement with Hardy Ltd on 1 July 2019 for an item of machinery. Thomas Ltd pays $4,000 to enter the lease contract (direct costs). Hardy Ltd incurs $6,000 of direct costs in arranging the lease. There is a payment of $80,000 to be made in advance each year, with the first being made on 1 July 2020. Included in these payments is $5,000 representing payment to the lessor for insurance and maintenance of the machinery. There is a purchase option that Thomas Ltd will be willing to exercise at the end of the fifth year for $60,000. The machinery is expected to have a useful life of eight years and a residual value of $20,000 at the end of its useful life. 

The interest rate implicit in the lease is 8%. 

* NPV Tables are available for reference. 

Question 2(a) (4 marks) 

Determine the initial measurement of the lease liability.

Determine the initial measurement of the right-of-use asset.

Required: Calculate the stream of interest expenses across the lease term.

Required: Provide the accounting journal entries for Thomas Ltd for the year ended 30 June 2020,

Answer 1

Answer