Journal entries to account for the lease

Reference no: EM132950456

Manufacturer lessor

James Ltd manufactures specialized Machinery for both sale and lease. On 1 July 2020, James Ltd leased one of this Machinery to Freddy Ltd, incurring $1200 in costs to prepare and execute the lease document. Freddy Ltd incurred $650 in costs to negotiate the agreement. The Machinery being leased costs James Ltd $55 072 to manufacture. The Machinery is expected to have an economic life of 6 years, after which time it will have a residual value of $950. The lease agreement details are as follows.

Length of lease 5 years

Commencement date 1 July 2020

Annual lease payment, payable 30 June each year commencing 30 June 2021 $16 000

Residual value at the end of the lease term, fully guaranteed by Freddy Ltd $8 000

Interest rate implicit in the lease 8%

All insurance and maintenance costs are paid by James Ltd and amount to $3 000 per year and will be reimbursed by Freddy Ltd by being included in the annual lease payment of $16 000. The Machinery will be depreciated on a straight-line basis. It is expected that Freddy Ltd will return the Machinery to James Ltd at the end of the lease.

Required

1. Prepare the journal entries to account for the lease in the books of Freddy Ltd for the year ended 30 June 2021. (Show all the workings and round off to the nearest whole number)

2. Prepare the journal entries to account for the lease in the books of James Ltd for the year ended 30 June 2021. (Show all the workings and round off to the nearest whole number)

Reference no: EM132950456

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