Reference no: EM132717109

Sandy Ltd enters into a non-cancellable five-year lease agreement with Bill Ltd on 1 July 2019. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1 294 384. The cost of the machinery to Bill Ltd is $1200 000.

• The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210 000. There is a bargain purchase option that Sandy Ltd will be able to exercise at the end of the fifth year for $280 000.

• There are to be five annual payments of $350 000, the first being made on 30 June 2020. Included within the $350 000 lease payments is an amount of $35 000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The interest rate implicit in the lease is 12 per cent.

Additional Information:

1. Present value of an annuity in arrears of $1 for five years at 12 per cent = 3.6048
2. Present value of $1 in five years at 12 per cent = 0.5674

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

Required

Problem A) Prepare the journal entries to account for the lease transaction in the books of Sandy Ltd at 1 July 2019 and 30 June 2020.