Question 4 17 Marks

On 1 July 2020, Andrew Ltd enters into a 5-year agreement to lease an item of machinery from Josh Ltd. Andrew Ltd incurred costs of $4 500 in setting up the lease agreement. The machinery has a fair value of $450 000 at the inception of the lease and it is expected to have an economic life of 6 years, after which time it will have a residual value of $35 000. The lease agreement details are as follows:

Length of lease	5years
Commencement date	1 July 2020
Annual lease payment, payable 30 June each year commencing 30 June 2021	$95,000
Residual value at the end of the lease term	$80,000
Residual value guarantee by Andrew Ltd	$50,000
Interest rate implicit in the lease	10%
The lease is cancellable without any penalties

All insurance and maintenance costs are paid by Josh Ltd and are expected to amount to $15 000 per year and will be reimbursed by Andrew Ltd by being included in the annual lease payment of $95 000. The machinery will be depreciated on a straight-line basis. It is expected that Andrew Ltd will return the machinery to Josh Ltd at the end of the lease.

Present Value Interest Factor of Annuity (PVIFA) for 10% 5 years is 3.7908 and Present Value Interest Factor (PVIF) for 10% 5 years is 0.6209.

Required:

1. Calculate the initial lease liability recongnised by Andrew Ltd to negotiate the lease agreement.

(3 marks)

2. Prepare the journal entries to account for the lease in the books of Andrew Ltd for the year ending 30 June 2021.

(4 marks)

3. Prepare a schedule of lease receipts for Josh Ltd. (5 marks)

4. Prepare the journal entries to account for the lease in the books of Josh Ltd for the year ending 30 June 2021. (5 marks)