Question
Question 2 (23 marks) On 1 July 2021, Warwick Ltd leased a machine from Bath Ltd. On that day, the machine had a fair value
Question 2 (23 marks)
On 1 July 2021, Warwick Ltd leased a machine from Bath Ltd. On that day, the machine had a fair value of $43,500. The machine is expected to have an economic life of 6 years. The lease agreement, which cost Warwick Ltd $390 to draft, contained the following information:
Lease term | 4 years |
Annual payment, in advance on 1 July each year | 12,300 |
Guaranteed residual value at the end of the lease term | 9,000 |
Residual value at the end of the useful life | 5,000 |
Interest rate implicit in the lease | 7% |
The lease is cancellable only with the permission of Bath Ltd |
|
The annual payment of $12,300 by Warwick Ltd included an amount of $2,300 p.a. to reimburse Bath Ltd for the insurance and maintenance cost paid by Bath Ltd. The machine will be depreciated on a straight-line basis. At the end of the lease term, Warwick Ltd returned the machine to Bath Ltd which sold it for $6,000 on the same day.
Required:
(a) | Prepare the journal entries for Warwick Ltd from 1 July 2021 to 30 June 2022. | (10 marks) |
(b) | Prepare the journal entries for Warwick Ltd from 1 July 2024 to 30 June 2025. | (13 marks) |
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