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Prepare the journal entries to account for the lease

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Question - 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 -

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

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: EM133020982

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