Cobalt Ltd owns an item of machinery that has a cost of $700,000 and accumulated depreciation of $200,000 as at 1 July 2003.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 per cent 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 2003 and 30 June 2004 (rounded to the nearest dollar)?
E) None of the given answers.

Question

Quizplus · Accepted Answer

1 July 2003: 
- Record sale of machinery: 
   Debit Cash $533,493
   Credit Machinery $700,000
   Credit Accumulated depreciation $200,000
   Credit Gain on sale of machinery ($33,493)

- Record leaseback: 
   Debit Machinery $533,493
   Credit Lease liability $533,493

30 June 2004: 
- Record lease payment: 
   Debit Lease liability $100,000
   Credit Cash $100,00

- Record interest expense: 
   Debit Interest expense $53,349
   Credit Lease liability $46,651

- Calculate depreciation expense: 
   Depreciation expense = (Cost - residual value)/remaining life
   = ($700,000 - $0)/8
   = $87,500

- Record depreciation expense: 
   Debit Depreciation expense $87,500
   Credit Accumulated depreciation $87,500

Cobalt Ltd Owns an Item of Machinery That Has a Cost