ABC Ltd entered into a lease agreement for a new packaging machine The lease contract gives ABC Ltd the right to use the machine for the period of the lease The machine is an identified asset and is a lease for the purposes of AASB 16 Leases ABC Ltd uses AASB 16 to account for the lease agreement The lease commences on 1 July 2016 The lease terms are as follows Lease payments 5 equal annual payments of $ 100,000 to be made in advance The first payment is due on commencement date and the final payment is due on 1 July 2020 Use of the packaging machine There are no restrictions imposed by the lessor on ABC Ltds use of the machine but required to insure the machine Purchase option ABC Ltd has the option to pay $200,000 on 1 July 2021, which will result in the transfer of legal ownership ABC Ltd is unsure if it will exercise the option due to uncertainties over the future sales of its products Return of the machine to the lessor Required to return the machine to the lessor on 1 July 2021 Additional information The lessor advises ABC that the interest rate implicit in the lease agreement is 8 If it were to borrow to acquire the machine, the incremental borrowing rate would be 9 ABC paid a 12 month insurance premium of $5,000 on 1 July 2016 The useful life of the machine is 10 years ABC Ltd uses the straight line depreciation method Required Prepare the journal entries required to record the transactions in the books orf ABC Ltd for the initial recognition and for the years ended 30 June 2017 and 30 June 2018 Narrations are required ( 24 marks)

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ABC Ltd entered into a lease agreement for a new packaging machine. The lease contract gives ABC Ltd the right to use the machine for

ABC Ltd entered into a lease agreement for a new packaging machine. The lease contract gives ABC Ltd the right to use the machine for the period of the lease. The machine is an identified asset and is a lease for the purposes of AASB 16 Leases. ABC Ltd uses AASB 16 to account for the lease agreement. The lease commences on 1 July 2016. The lease terms are as follows:

Lease payments	5 equal annual payments of $ 100,000 to be made in advance. The first payment is due on commencement date and the final payment is due on 1 July 2020.
Use of the packaging machine	There are no restrictions imposed by the lessor on ABC Ltds use of the machine but required to insure the machine.
Purchase option	ABC Ltd has the option to pay $200,000 on 1 July 2021, which will result in the transfer of legal ownership. ABC Ltd is unsure if it will exercise the option due to uncertainties over the future sales of its products.
Return of the machine to the lessor	Required to return the machine to the lessor on 1 July 2021.

Additional information:

The lessor advises ABC that the interest rate implicit in the lease agreement is 8%. If it were to borrow to acquire the machine, the incremental borrowing rate would be 9%.
ABC paid a 12-month insurance premium of $5,000 on 1 July 2016.
The useful life of the machine is 10 years.
ABC Ltd uses the straight line depreciation method.

Required

Prepare the journal entries required to record the transactions in the books orf ABC Ltd for the initial recognition and for the years ended 30 June 2017 and 30 June 2018. Narrations are required. ( 24 marks)