Calipso Ltd sells and leases office furniture. On 1 July 2010 Calipso Ltd enters into a lease agreement with Ice Ltd. The following are the provisions of the lease agreement:
• The lease contract requires an immediate payment on 1 July 2010 of $19,000 and annual payments of $19,000 on 30 June 2011, 2012, 2013 and 2014.
• The fair value of the office furniture equipment is $92,310 at 1 July 2010
• The lease term is for 5 years
• Ice Ltd has guaranteed 100% of the residual value of $10,000 at the end of the lease term on 30 June 2015.
• The expected life of the furniture is 6 years, but Ice Ltd is not expected to purchase it at the end of the lease
• The interest rate implicit in the lease is 6%.
• The lease has been classified by both Calipso Ltd, the lessor, and Ice Ltd, the lessee, as a finance lease.
Required:
(i) Prove that the interest rate implicit in the lease is 6%.
(ii) Prepare a schedule of the lease payments to be made by the lessee, Ice Ltd for the duration of the lease.
(iii) Prepare the journal entries to account for the lease in the books of Stanwell Ltd (the lessee) on 30 June.