LO3, 4, 7 10.15 Lease classification, lease accounting On 1 July 2019, Cosway Ltd purchased equipment for its fair value and then leased it to Valley Ltd, incurring $2548 in costs to prepare and execute the lease document. Valley Lud incurred $1935 in costs to negotiate economic life of 6 years, after which time it will have a residual value of $6000. The lease agree- ment details are as follows. the agreement. The equipment is expected to have an Length of lease Commencement date Annual lease payment, payable 1 July each year commencing 1 July 2019 Residual value at the end of the lease term, of which 50% is guaranteed by Valey Ltd Interest rate implicit in the lease 5 years 1 July 2019 $15000 $12000 6% All insurance and maintenance costs are paid by Cosway Ltd and amount to $3000 per year and will be reimbursed by Valley Ltd by being included in the annual lease payment o The equipment will be depreciated on a straight-line basis. It is expected that Valley Lid return the equipment to Cosway Ltd at the end of the lease. Required 1. Calculate the fair value of the leased equipment at 1 July 2019. 2. Prepare the journal entries to account for the lease in the books of Valley Lud for they ended 30 June 2020. 3. Prepare the journal entries to account for the lease in the books of Cosway Ltd for the ended 30 June 2020. 96 Financial reporting in Australia LO3, 4, 7 10.15 Lease classification, lease accounting On 1 July 2019, Cosway Ltd purchased equipment for its fair value and then leased it to Valley Ltd, incurring $2548 in costs to prepare and execute the lease document. Valley Lud incurred $1935 in costs to negotiate economic life of 6 years, after which time it will have a residual value of $6000. The lease agree- ment details are as follows. the agreement. The equipment is expected to have an Length of lease Commencement date Annual lease payment, payable 1 July each year commencing 1 July 2019 Residual value at the end of the lease term, of which 50% is guaranteed by Valey Ltd Interest rate implicit in the lease 5 years 1 July 2019 $15000 $12000 6% All insurance and maintenance costs are paid by Cosway Ltd and amount to $3000 per year and will be reimbursed by Valley Ltd by being included in the annual lease payment o The equipment will be depreciated on a straight-line basis. It is expected that Valley Lid return the equipment to Cosway Ltd at the end of the lease. Required 1. Calculate the fair value of the leased equipment at 1 July 2019. 2. Prepare the journal entries to account for the lease in the books of Valley Lud for they ended 30 June 2020. 3. Prepare the journal entries to account for the lease in the books of Cosway Ltd for the ended 30 June 2020. 96 Financial reporting in Australia