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Prepare journal entries in the books of moshman ltd

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Reference no: EM132493281

On 1 July, 2020 Moshman Ltd entered into a four-year lease of a large item of mining equipment from Lessor Ltd. The terms of the lease agreement are as follows.

  1. A payment of $100,000 is required on 1 July, 2020.
  2. Four subsequent payments of $220,000 are due starting on 30 June 2021.
  3. Moshman Ltd has no intention to extend the lease.
  4. The economic life of the equipment is estimated to be eight years.
  5. Moshman Ltd has agreed to guarantee a residual value of $120,000.
  6. The fair value of the machinery at the commencement of the lease is $1,001,154.
  7. The interest rate implicit in the lease is 4 per cent.
  8. Assume that the contract is a lease for the purposes of AASB 16 'Leases'.

REQUIRED:

Question 1: Prepare journal entries in the books of Moshman Ltd to record the lease in its first year (i.e. 1 July 2020 to 30 June 2021) in accordance with the requirements of AASB 16 'Leases'. Show all necessary working, explanations and assumptions to support your answer.

Question 2: Explain how Lessor Ltd would classify the lease in accordance with the requirements of AASB 116 'Leases'. Show all necessary working, explanations and assumptions to support your answer. (Note: No journal entries are required).

Reference no: EM132493281

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