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Case Study: Starfish Ltd entered into a non-cancellable four year lease agreement with Oceans Ltd on 1 July 2022. The machinery cost Oceans Ltd $160,000 to manufacture and at the inception of the lease, it had a fair value of $201,910. This machinery is expected to have a useful life of six years, after which it will have a salvage value of $36,000. Starfish Ltd will make four annual lease payments of $60,000, with the first being made on 30 June 2023. Included in the annual lease payment is an amount of $6,000 representing payment to the lessor for the insurance and maintenance of the equipment. The residual value at the end of the lease term is $45,000 and the lessee has guaranteed $25,000. Starfish Ltd intends to return the machinery to Oceans at the end of the lease term.
Questions:
A. Prepare the lease receipts schedule for Oceans Ltd using the interest rate implicit in the lease of 10%. Show all workings and round off to the nearest dollar.
B. Prepare the journal entries for Oceans Ltd for the year ending 30 June 2023.
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