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Prepare journal entries to account for the lease in books

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Reference no: EM132918897

Sea Ltd manufactures specialised machinery for both sale and lease. On 1 July 2020, Sea Ltd leased a machine to Zero Ltd. Zero Ltd incurred $2 000 to negotiate the contract. The machine being leased cost Sea Ltd $410 000 to make and its fair value at 1 July 2020 is considered to be $479 994.

The terms of the lease are as follows.

The lease term is for 5 years, starting on                   1 July 2020
Annual lease payment, payable on 30 June each year     $128 000
Estimated useful life of machine (scrap value $30 000)      8 years
Estimated residual value of machine at end of lease term     $16 000
Residual value guarantee by Zero Ltd                                    $10 000
Interest rate implicit in the lease                                            10%

  • The annual lease payment includes an amount of $4 000 to cover annual maintenance and insurance costs.
  • Zero Ltd may cancel the lease but only with the permission of the lessor.
  • Zero Ltd intends to lease another machine from Oceans at the end of the lease term.

Required

Problem 1. Prepare the journal entries to account for the lease in the books of Zero Ltd for the year ended 30 June 2021.

Problem 2. Prepare the journal entries to account for the lease in the books of Sea Ltd for the year ended 30 June 2021.

Reference no: EM132918897

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