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Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $231140. The machinery is expected to have an economic life of seven years, after which time it wil have no residual value. There is a bargain purchase option which Gregory Ltd will be able to exercise at the end of the fifth year, of $50000.
Sanders Ltd manufactures the machinery. The cost of the machinery to Sander Ltd is $200000. There are to be five annual payments of $62500, the first being made on 30 June 2024. Included within the $62500 lease payments is an amount of S6250 representing payment to the lessor for the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis, the rate of interest implicit in the lease is 12 per cent.
Required:
Problem 1: Make the journal entries for the years ending 30 June 2024 and 30 June 2025 in the books of:
a. Sanders Ltd
b. Gregory Ltd
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