Question

Jennings Ltd entered into a lease involving machinery on 1 January 2019. The lease had the

following characteristics:

One initial payment of $100,000 at the date of signing. Three further payments of $100,000 are to be made at the end of 2019, 2020 and 2021. A residual payment of $40,000 is to be made at the end of 2022.

Jennings Ltd will take ownership of the machinery at the end of 2022. The interest rate of the lease is 20% p.a.
The machinery is expected to have a five years useful life.
The present value of the machinery at 1 January 2019 was $329,940.

1. Provide the journal entries required in the books of Jennings Ltd for the year ended 31 December 2019. Show all workings (narrations are not required).

Answer 1

Date	Account Titles	Debit $	Credit $
1 January .2019	Right of use asset	329,940
	Lease liability		329,940
1 January .2019	Lease liability	100,000
	Cash		100,000
31 December .2019	Amortization Expense	82,485
	Right of use asset		82,485
	(329,940/4 )
31 December .2019	Interest Expense ( 329,940 - 100,000 ) x 20%	45,988
	Lease liability	54,012
	Cash		100,000