On 1 July 2013, Emmet, the executive director of the Master Builders Association, entered into a contract with Wyldstyle Ltd to lease special equipment called a ‘Piece de Resistance'. The equipment had cost Wyldstyle Ltd $40 000 to manufacture and at the inception of the lease had a fair value of $46 904. The equipment will depreciate on a straight line basis and the annual payments include an amount of $1800 for maintenance and insurance. The finance lease agreement, which requires the first payment to be made at inception, contained the following provisions:
Lease term 3 years
Annual payment, to be paid in advance $15800
Unguaranteed residual value at end of lease term $10000
Expected economic useful life 4 years
Interest rate implicit in the lease 8%
According to the requirements of AASB 117:
a Show calculations for Emmet that support the implicit interest rate in the lease is 8%.
b Prepare a schedule showing the division of the lease rental into interest and principal components. In your answer please clearly date each entry. Marks will be deducted for incorrect or missing dates.
c Prepare general journal entries in the books of the lessee, Emmet, for the years ending 30 June 2014 and 2015. In your answer please clearly date each entry.