Reference no: EM133005185
Question - On 1 July 2020, Sand Ltd enters into a seven-year lease agreement with Bill Ltd. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $231 140. The lease payments are made at the end of each year and amount to $60,000. The lease payments include cost of servicing the machinery at an amount of $10,000 per annum. The fair value of truck at inception of the lease is $263,948.
Bill Ltd manufactures the machinery. The cost of the machinery to Bill Ltd is $200,000. The machinery is expected to have an economic life of eight years, after which it will have no residual value.
Sand Ltd has not made any commitment to the lessor to purchase it. There is an unguaranteed residual at the end of the lease term of $40 000. Interest rate implicit in the lease is 10 per cent.
Additional Information:
-Present value of an annuity in arrears of $1 for seven years at 10 per cent = 4.8684
-Present value of $1 in seven years at 10 per cent = 0.5132
Required - Prepare the journal entries to account for the lease transaction in the books of Bill Ltd, at 1 July 2020 and 30 June 2021.
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