On 2 January 2020, DRH Limited signed a 5-year lease up to 31 December 2024 to use an electricity plant to be installed in its factory with an annual payment of $200,000. DRH paid the initial annual payment on 2 January 2020 to the lessor, Voltas Inc., which agreed to deliver and install the plant by 10 January 2020. Five remaining annual lease payments would be made at the end of each year beginning from 31 December 2020. DRH also committed a guarantee to Voltas Inc., that the leased plant should have a value not less than $200,000 at the end of the lease. The parent of DRH, HRD Holding Inc., arranged a further guarantee of $40,000 in respect of the leased plant. To protect its interest in the plant, Voltas Inc., in turn obtained a guarantee from an insurance agent that the residual value was not less than $260,000. Based on the information given,

a) DETERMINE the minimum lease payment of the lease to DRH and Voltas Inc. (5 marks)

b) If the interest rate implicit in the lease of DRH Limited is 8%. CALCULATE the present value of the leases minimum payment to DRH. (13 marks)

c) From the perspective of the lessor, Voltas Inc., the interest rate implicit in the lease is also 8%. Voltas Inc. estimated that the fair value of the plant was $1,200,000 at the inception, and the unguaranteed residual value at the end of the lease was roughly $36,000. CALCULATE the gross investment, net investment, and unearned finance income in the lease of Voltas Inc. and PREPARE the journal entries at the inception.

d)CALCULATE the finance charges and depreciation expenses for the finance lease of DRH and PREPARE the journal entries for the years ended 31 December 2020 and 20