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 paymentsin 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 978or, FV of leased asset

Journal entries at 1 July, 2020

DrMachinery$1 325978

CrCash$1 325 978

DrLeasereceivable$1 325 978

CrMachinery$1 325 978

DrCash$100 000

CrLeasereceivable$100 000

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