Reference no: EM132907540

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

Round all calculations to the nearest dollar and show All workings and calculations.

Required

Problem 1: Prepare the journal entries to account for the lease transaction in the books of Bill Ltd, at 1 July 2020 and 30 June 2021.