On 30 June 2022, Happy Ltd purchased machinery for its fair value of $41 600 and then leased it to Laugh Ltd. Laugh Ltd incurred $220, and Happy Ltd incurred $797, in costs to negotiate the lease agreement. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $2500. The lease agreement details are as follows.
On 30 June 2022, Happy Ltd purchased machinery for its fair value of $41 600 and then leased it to Laugh Ltd. Laugh Ltd incurred $220, and Happy Ltd incurred $797, in costs to negotiate the lease agreement. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $2500. The lease agreement details are as follows.
|
Length of lease |
4 years |
|
Commencement date |
30 June 2022 |
|
Annual lease payment, payable 30 June each year commencing 30 June 2022 |
$12 000 |
|
Residual value at the end of the lease term |
$10 000 |
|
Residual value guarantee by lessee |
$8 000 |
|
Interest rate implicit in the lease |
9% |
All insurance and maintenance costs are paid by Happy Ltd and amount to $2 000 per year and will be reimbursed by Laugh Ltd by being included in the annual lease payment of $12 000. The lease has been classified as a finance lease by Happy Ltd.
The machinery will be
Required:
- Prepare the
journal entries to account for the inception of the lease on 30 June 2022, in the books of Laugh Ltd. - Prepare the journal entries to account for the lease in the books of Laugh Ltd for the year ended and 30 June 2023.
- Prepare the journal entries to account for the inception of the lease on 30 June 2022, in the books of Happy Ltd.
- Prepare the journal entries to account for the lease in the books of Happy Ltd for the year ended and 30 June 2023.
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