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 lease transaction on 1

January 2020 are: