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 Small Limited to record the lease transaction on 1st January 2020

are