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How do prepare journal entries for the years ending june

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Bear Island Ltd enters into a non-cancellable five year agreement with Rankin Ltd on 1 July, 2015. The lease is for an item of machinery that at the inception of the lease, has a fair value of $231,140. The machinery is expected to have an economic life of seven years, after which time it will have no residual value. There is a bargain purchase option which Bear Island Ltd will be able to exercise at the end of the fifth year for $50,000.

  • Rankin Ltd manufactures the machinery. The cost of the machinery to Rankin Ltd is $200,000. There are to be five annual payments of $62,500, the first being made on 30 June 2016. Included within the $62,500 lease payments is an amount of $6,250 representing payment to the lessor for the insurance of the machinery. The machinery is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 percent.

Required:

Problem 1: Prepare the journal entries for the years ending 30 June 2016 and 30 June 2017 in the books of Bear Island Ltd.

Reference no: EM132761640

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