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Gregory Ltd enters into a non-cancellable five-year lease with Sanders Ltd on 1 July 2023. the lease is for an item of machinery that, at the inception of the lease, has a fair value of $231,140. 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 2024. 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:
Problem 1: Prepare the journal entries for the years ending 30 June 2024 and 30 June 2025 in the books of :
(a) Sanders Ltd(b) Gregory Ltd
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