Jet Star Ltd. enters into a non-cancellable six-year lease agreement with Airbus Ltd. on 1...
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Jet Star Ltd. enters into a non-cancellable six-year lease agreement with Airbus Ltd. on 1 July 2021, the beginning of the financial year of both companies. The agreement is for leasing an aircraft that is expected to have an economic life of 8 years, after which time it will have no residual value. There is a bargain purchase option, which Jet Star Ltd. will be able to exercise at the end of year four, for $20 000.
Airbus Ltd. is aircraft manufacture. The cost of the aircraft to Airbus Ltd. is $400 000. There are to be four annual payments of $125 000, the first being made on 30 June 2022.The aircraft is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 10%.
Required
a)Calculate the present value of lease payments. Show the calculations.(2 Marks)
b)Prepare the journal entries in the books of Jet Star Ltd. on 30 June 2022.(5 Marks)
c)Prepare the journal entries in the books of Airbus Ltd. on 1 July 2021.(4 Marks)
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