Problem
On 1 July 2016, Christchurch Ltd leased a processing plant to Wellington Ltd. The plant was purchased by Christchurch Ltd on 1 July 2016 for its fair value of $467 112. The lease agreement contained the following provisions:
Lease term 3 years
Economic life of the plant 5 years
Annual rental payment, in arrears $150 000
Residual value at the end of the lease term $90 000
Residual guaranteed by the lessee $60 000
Interest rate implicit in the lease 11%
The lease is cancellable only with the permission of the lessor
Welling Ltd intends to purchase the processing plant at the end of the lease term for $50 000. The lease has been classified as a finance lease.
Task
Prepare the journal entries to account for the contract over the lease term (Hint: First prepare the lease payments schedule). Narrations are required.