Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2023. The lease is for
Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2023. The lease is for item of machinery that, at the inception of the lease, has a fair value of $231140. The machinery is expected to have an economic life of seven years, after which time it will have no residual value.
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 percent.
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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