PRACTICAL QUESTION (20 marks)
On 1 July 2021 Fairval Ltd (the lessee) contracts a lease equipment for five years at an annual rental of $20,000, with the first payment payable immediately and subsequent annual payments due on 30 June. The equipment could have been purchased from the supplier for $80,747 on 1 July 2021 if leasing was not chosen instead. The rate of interest implicit in the lease is 12% and the end of the reporting period is 30 June. Assume the equipment is returned to the lessor at the end of the lease, when the residual value of the equipment is nil.
1) Provide general journal entries to record the lease on 1 July 2021 for Fairval Ltd. (5 marks)2) Provide a schedule showing the division of the lease rental into interest and principal components for the lessee over the term of the lease. (5 marks)3) Provide the depreciation schedule for the lessee assuming the right-of-use asset is depreciated over the term of the lease (straight-line method). (2 marks)4) 5) Based on the case, explain the motivation for the standard setter to release the new lease standard (AASB 16). (2 marks)
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