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Question 2 (23 marks) On 1 July 2021, Warwick Ltd leased a machine...

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Accounting

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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