X Ltd enters into a 5-year agreement to lease an item of machinery from Y Ltd on 1 July 2019. X Ltd incurred costs of $3928 in setting up the lease agreement. The machinery has a fair value of $492 000 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 $45 000. The lease agreement details are as follows:

Length of lease	5 years
Commencement date	1 July 2019
Annual lease payment, payable 30 June each year commencing 30 June 2020	$110,000
Residual value at the end of the lease term	$100,000
Residual value guarantee by X Ltd	$60,000
Interest rate implicit in the lease	6%
The lease is cancellable without any penalties

All insurance and maintenance costs are paid by Y Ltd and are expected to amount to $10 000 per year and will be reimbursed by X Ltd by being included in the annual lease payment of $110 000. The machinery will be depreciated on a straight-line basis. It is expected that X Ltd will return the machinery to Y Ltd at the end of the lease.

Note:

Present Value Interest Factor of Annuity (PVIFA) for 6% 5 years is 4.2124 and Present Value Interest Factor (PVIF) for 6% 5 years is 0.7473.

Required:

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

(3 marks)

2. Prepare the journal entries to account for the lease in the books of X Ltd for the year ending 30 June 2020.

(4 marks)

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

4. Prepare the journal entries to account for the lease in the books of Y Ltd for the year ending 30 June 2020. (5 marks)