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On 30 June 2022, Road Ltd leased a machine to Path Ltd. The machine was in the records of Road Ltd on 30 June 2022

On 30 June 2022, Road Ltd leased a machine to Path Ltd. The machine was in the records of Road Ltd on 30 June 2022 at its fair value of $162,000. The lease agreement contained the following provisions:

Lease term

3 years

Economic life of machine

4 years

Annual rental payment, in advance (first payment on 30/6/22)

$55,000

Residual value at end of the lease term

$15,000

Residual value guaranteed by lessee

$12,000

Interest rate implicit in lease

9%

Present value of $1 in 3 years at 9%

0.7722

Present value of an annuity of $1 for 2 payments at 9%

1.7591

Present value of an annuity of $1 for 3 payments at 9%

2.5313

The machine will be depreciated by Path Ltd on a straight-line basis. Path Ltd intends to return the machine to Road Ltd at the end of the lease term. The lease has been classified as a finance lease by Road Ltd.

Initial direct costs for setting up the lease were incurred by both parties: $1,983 for Path Ltd and $1,334 for Road Ltd.

Required:

a) Prepare the lease payments schedule for Path Ltd. Show all calculations. (6 marks)

b) Prepare the journal entries in the records of Path Ltd on 30 June 2022 and 30 June 2023. Show all calculations. (5 marks)

c) Prepare the journal entries in the records of Road Ltd on 30 June 2022 and 30 June 2023. Show all calculations. (4 marks)

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