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 annual lease payments paid for years ended 31 December 2020

are: