Discussion:
Simons Company leased a machine from an established machine dealer, Machine Guarantee Limited. The dealer acquired the machine at a cost of $180,000. The cost of repairing the machine to make it suitable for another owners will be $40,000. Simons Company plans to keep the machine after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:
• Date of entering lease: July 1, 2011
• Duration of lease: 4 years
• Life of leased asset: 5 years, after which it will have no salvage value
• Lease payments: $100,000 at the end of each year
• Interest rate implicit in the lease: 10%
• Unguaranteed residual: $50,000
• Fair value of truck at inception of the lease: $351, 140
Required:
(i) Prepare the journal entries to account for the lease transaction in the books of the lessor, Machine Guarantee Limited.
(ii) Prepare the journal entries to account for the lease transaction in the books of the lessee, Simons Limited.