LeasesRus Ltd has entered into an agreement to lease an item of machinery to Weleaseit Ltd.

LeasesRus Ltd has entered into an agreement to lease an item of machinery to Weleaseit Ltd. Weleaseit is having difficulties meeting its debt covenant obligations and the parties have agreed to refer to the lease as an operating lease in all documentation. The lease agreement details are as follows: Lease term 5 years Commencement date 1 July 2010 Lease payments: $2000 at lease inception and then annual lease payments of $10,000, payable at 30 June each year commencing 30/6/11. Included in the annual lease payments is an amount of $2000 payable to LeasesRus for insurance and maintenance of the machinery Fair value of the machinery at 1 July 2010 $42,904 Estimated economic life of the machinery 6 years Estimated residual value of the machinery at the end of its economic life $2,000 Residual value at the end of the lease term, of which 50% is guaranteed by Weleaseit Ltd $8,000 The lease is cancellable, but a penalty of 50% of the total lease payments is payable on cancellation. Weleaseit Ltd does not intend to take ownership of the machinery at the end of the lease term. Required: A. State how both companies should classify the lease. Give reasons for your answer. B. Determine the interest rate implicit in the lease C. Prepare a schedule of lease payments for Weleaseit Ltd D. Prepare a schedule of lease payments for LeasesRus Ltd E. Prepare journal entries to record the lease transactions for the year ended 30 June 2011 and 2012 in the records of both companies F. Prepare an appropriate note to the financial statements of both companies at 30 June 2012