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Problem - Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2019. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $231 140. The machinery is expected to have an economic life of seven years, after which time it will have no residual value. There is a bargain purchase option, which Gregory Ltd will be able to exercise at the end of the fifth year, for $50 000.
Sanders Ltd manufactures the machinery. The cost of the machinery to Sanders Ltd is $200 000. There are to be five annual payments of $62 500, the first being made on 30 June 2020. Included within the $62 500 lease payments is an amount of $6250 representing payment to the lessor for the insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The rate of interest implicit in the lease is 12 per cent.
REQUIRED - Prepare the journal entries for the years ending 30 June 2020 and 30 June 2021 in the books of: (a) Sanders Ltd (b) Gregory Ltd.
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