A lease was signed on January 1, 2021 for four years. Annual rentals payable at end of each year were agreed at Rs. 13,000. In addition to annual rentals lessee pays Rs. 500 annually for insurance. Useful life of equipment was 4 years and interest rate implicit in the lease was 20%. Fair value of equipment was Rs. 36,000.
Residual value guaranteed by the lessee was Rs. 1,500.(20)
The asset reverts back to lessor at end of lease period.
Required:
a) In the books of lessee prepare journal entries to record acquisition of equipment and annual depreciation.
b) Compute annual charges to profit and loss account.
