Cobalt Ltd owns an item of machinery that has a cost of $700 000 and accumulated depreciation of $200 000 as at 1 July 2013.On that date the machine is sold to Blue Ltd for $533 493,and then leased back over 8 years (the remaining life of the machine).The lease is non-cancellable.The lease payments are $100 000 per annum,payable in arrears on 30 June each year.The interest rate implicit in the lease is 10% and the economic benefits of the asset are expected to be realised evenly over its life.What are the entries to record the transactions in Blue's books on 1 July 2013 and 30 June 2014 (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

1 July 2013:
- Record the sale of the machinery:
   Cash                                           $533,493
   Accumulated depreciation              $200,000
   Machinery                                  $700,000
   Gain on sale of machinery              $33,493
- Record the leaseback:
   Lease Receivable                          $533,493
   Machinery                                  $533,493

30 June 2014:
- Record the lease payment:
  Lease Receivable                $100,000
   Interest Income                        $53,349 [(533,493-100,000)*10%]
   Machinery Lease Liability           $46,651 (100,000-53,349)

Note: The depreciation expense is not recorded because Blue Ltd is not the owner of the machinery, but the lessee.

Cobalt Ltd Owns an Item of Machinery That Has a Cost