Question 10.8,ch10

Question 10.8,ch10 - Question 10.4 Acoungftiraelsbyh On 30...

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Question 10.4 A cou n t i g fo ra f an c e lea se b y th le On 30 June 2015, Rahway Prison Ltd arranged to lease equipment from Cheapa Finance Co. Limited. At the inception of the lease, the equipment had a fair value of $1 100 000, an estimated useful economic life of 10 years and an estimated scrap value of $Nil. Rahway Prison Ltd intends to purchase the equipment at the end of the lease term for its guaranteed residual value. The lease term is 7 years and payments of $237 692 are due in advance on 30 June each year. The guaranteed residual value of the equipment at the end of the lease term is $200 000. If the lease is cancelled by Rahway Prison Ltd a cancellation payment of $500 000 applies. The interest rate implicit in the lease is 24% p.a. Required A. Explain whether Rahway Prison Ltd should classify the lease as finance lease or an operating lease. B. Prepare the lease repayment schedule. C. On the basis that the lease is a finance lease, prepare the journal entries of Rahway Prison in respect of all years.
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