January 2020. The lease was for a factory equipment that is expected to have an

economic life of eight years, after which time it will have no salvage value.

There is a bargain option, which Small Limited will be able to exercise at the end

of the seventh year, for $140,000. Big Limited manufactured the equipment at a

cost of $3,200,000. There are to be seven annual instalments of $1,300,000 per

annum to be paid at the end of each year. Included in the annual lease payment

is an amount of $20,000 per annum representing payment to Big Limited for the

insurance and maintenance of the equipment. The equipment is to be depreciated

using straight-line method. The rate of interest implicit in the lease is 15

per cent. The journal entries

in the books of Big Limited to record the annual lease payments received as at

31 December 2020 are: