**Working**

Present value of five payments of $25,000 in arrears at 7%:

| Year (t) | Payment | Discount factor 1/(1.07)^t | Present value |
|---|---|---|---|
| 1 | 25,000 | 0.934579... | 23,364.49 |
| 2 | 25,000 | 0.873439... | 21,835.97 |
| 3 | 25,000 | 0.816298... | 20,407.45 |
| 4 | 25,000 | 0.762895... | 19,072.38 |
| 5 | 25,000 | 0.712986... | 17,824.65 |

Sum = 25,000 x [1 - (1.07)^-5] / 0.07 = 25,000 x 4.100197... = 102,504.9359...

**Answers**

(a) Initial lease liability = **$102,504.94**

(b) Initial right-of-use (ROU) asset = **$102,504.94** (equal to the initial lease liability, since there are no initial direct costs, incentives, prepayments, or restoration costs)

Governing standard: **AASB 16 Leases** (the Australian equivalent of IFRS 16).