On 1 July 2020 Lessor Ltd purchased a large item of machinery for its fair value of $1 325 978. On that day, Lessee Ltd leased the machinery from Lessor Ltd on the following term:

Date of entering lease	1 July 2020
Duration of lease	4 yrs
Life of leased asset	8 yrs
Estimated residual value at the end of lease term	$500 000
Residual value Guaranteed	$120 000
Residual value Unguaranteed	$380 000
Lease payments	Up-front payment of $100 000 Then, annual payments of $260 000 being made at the end of each year (that is, 4 yearly payments in arrears.)
Fair value of leased asset at date of lease inception	$1 325 978

Included within annual lease payments is an amount of $40 000, which the lessor is charging as part of a service contract to maintain the machinery. The lease is classified as a finance lease by the lessor and the rate of interest implicit in the lease is 4 percent.

PV of lease paymts = 100 000 + (260 000 40 000) x 3.6299 + 120 000 x 0.8548 =$1001154

PV of the unguaranteed residual = $380 000 x 0.8548 = $324 824

Thus, net investment = $1 325 978 or, FV of leased asset

Journal entries at 1 July, 2020

Dr Machinery $1 325 978

Cr Cash $1 325 978

Dr Lease receivable $1 325 978

Cr Machinery $1 325 978

Dr Cash $100 000

Cr Lease receivable $100 000

Required: Prepare the journal entries on 30 June 2021 two years later for Lessor Ltd.