Question: On 1 July 201x, Large Mart leases a company car for the service department of the Bpple store (called the "Nerd Herd"). The duration of the lease is 8 years, and the car has an expected useful life of 9 years. The lease contract requires Large Mart to pay $5,000 at the time the lease is signed. This payment is made via a bank transfer. A further $8,000 must be paid (also via bank transfer) on the 30 June of each year, starting on the 30 June 201x+1. The lease contract states that Large Mart can cancel the lease at any time during the lease period, but that Large Mart must pay a fine equal to 85% of the remaining lease liability if the lease contract is cancelled. The interest rate implicit in the lease is 10%. Large Mart decided to enter into the lease agreement instead of purchasing the car because the purchase price would have been $47,800, and Large Mart did not have sufficient cash resources to make such a purchase at that time.
The car is depreciated using the same depreciation method that is used for all other Large Mart motor vehicles (see Large Mart Depreciation Schedule in Topic 2). Large Mart expects that the residual value of the car at the end of the useful life will be $500. The lease contract also includes a clause that allows Large Mart to purchase the car at the end of the lease term for a price of $400. At that time the fair value of the car is expected to be $1,000.
Provide all journal entries that are necessary in the books of Large Mart to record the inception of the lease for the car, the lease payments made at the end of the first year of the lease term (30 June 201x+1), and the depreciation of the leased car for the month ended 31 July 201x (if any depreciation is required).