Reference no: EM132752584

BB Ltd manufactures specialised machinery for both sale and lease. On 1 July 2014, BB leased a specialised machine to CC Ltd (CC), incurring $200 in costs to prepare and execute the lease document. CC incurred $500 in costs to negotiate the agreement. The penalty for cancellation of the lease is 50% of the total lease payment. The leased machine costed AA $51,000 to manufacture. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $6,000.

The lease agreement details are as follows.

Length of lease                      4 years
Commencement date           1 July 2014
Annual payments, payable 1st July commencing 1st July 2014  $22,000
Residual value at the end of lease term, 70% guaranteed by CC  $6,000
Implicit interest rate in the lease  8%

Maintenance is done once a year at the end of June by BB. The annual lease payment includes maintenance cost of $4000 per year. The machine is depreciated on a straight-line basis. It is expected that CC will return the machine to AA. The leased machine is sold at price of $4,000 once it is returned at the end of 2018.

Required:

Problem (1). Assuming it is a finance lease, prepare the journal entries for lessor on 1st July 2014, 30th June, 2015, and 30th June, 2018.

Problem (2). If the lessor is not a manufacturer, but a financier, and everything else stays the same, what would be your journal entries for the lessor on July 1st, 2015.