Prepare the journal entries for Sky Ltd

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Reference no: EM132746482

Problem - On 1 July 2019, Sky Ltd purchased equipment and then leased it to Blue Ltd. Blue Ltd incurred $1 200 in costs to negotiate the lease agreement. Sky Ltd incurred $1 000 in initial costs to prepare and execute the lease agreement. The lease agreement details are as follows.

Lease Term	5 years
Annual rental payments (payable in advance on 1 July each year)	$30,000
Residual value at the end of the lease term	$10,000
Residual value guarantee	9,000
Amount of the residual value guarantee that is expected to be payable by the lessee at the end of the lease term	$2,000
Interest rate implicit in the lease	5%

Blue Ltd expects to return the equipment to Sky Ltd at the end of the 5-year lease term. The annual rental payments include an amount of $5,000 to cover the cost of maintenance and repairs that were arranged and paid for by Sky Ltd.

Required -

a) Determine the fair value of equipment on 1 July 2019. Show all your workings.

b) Assuming that the lease is a finance lease from the perspective of Sky Ltd, prepare the journal entries for Sky Ltd from 1 July 2019 to 30 June 2020.

Reference no: EM132746482

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