Cheyanne Ltd has decided to lease a photocopier from Derek Ltd (a manufacturer company) over a 4 year lease period from 1 July 2013 to 30 June 2017. Derek Ltd had manufactured the copier at a cost of $27,000. The economic life of the asset is 5 years.
The terms of the lease are: $20,000 per annum over the 4 years with the first lease payment payable on 1 July 2013 and all remaining payments will be made at the end of each financial year. Residual value guaranteed by Cheyanne Ltd is $4,000. Estimated residual value when the photocopier is returned to Derek Ltd is $9,000. The interest rate implicit in the lease contract is 15%.
At the end of the lease, Cheyanne Ltd returns the photocopier to Derek Ltd. Assume that the lease meets the requirements of a finance lease.
1. Set out Derek Ltd's schedule of receipts and Cheyanne Ltd's schedule of payments for the lease period.
2. Record the journal entries in the books of Derek Ltd at 1 July, 2013 and for the year ending 30 June 2014.
3. Record the journal entries in the books of Cheyanne Ltd at 1 July, 2013 and for the year ending 30 June 2014.