ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery. There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the...

ABC Ltd enters into a five-year lease agreement with Legal Ltd on 1 July 2023 for an item of machinery.

There is a bargain purchase option that ABC Ltd will be willing to exercise at the end of the fifth year for $90 000. The machinery is expected to have a useful life of five years

There are to be five annual payments of $140 000, the first being made on 30 June 2024. Included within these payments is $20 000 representing payment to the lessor for insurance and maintenance of the equipment.

Additional information

Implicit interest rate: 8 per cent

Present value of an annuity in arrears of $1 for five years at 8 per cent = 3.9927

Present value of $1 in five years at 8 per cent = 0.6806

Required:

Determine the initial measurement of the lease liability