Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,814,536. The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $280,000. There are to be 8 annual payments of $400,000, the first being made on 30 June 2024. Included within the $400,000 lease payments is an amount of $30,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. REQUIRED Determine the rate of interest implicit in the lease Calculate the present value of lease payments (write details with formula)
Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,814,536.
The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $280,000.
There are to be 8 annual payments of $400,000, the first being made on 30 June 2024. Included within the $400,000 lease payments is an amount of $30,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be
REQUIRED
- Determine the rate of interest implicit in the lease
- Calculate the
present value of lease payments (write details with formula)
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