Glassmere Ltd (which applies IAS17) prepares accounts to 31 December each year. On 1 January 2014, the company acquired an asset by means of a finance lease. Details of the lease agreement are as follows:
Cash price of leased asset………………….. £27,500
Lease term………………………………………….. 5 years
Payments due annually in advance………. £6,595 each
Useful life of asset………………………………..7 years
Residual value……………………………………… £3,000
Rate of interest implicit in lease…………………10% per annum
Glassmere Ltd will obtain legal ownership of the asset at the end of the lease term. The company calculates depreciation on the straight-line basis.
Assuming that the actuarial method is used to allocate the finance charge over the lease term, calculate the finance charge and depreciation charge which should be shown in the company’s for each of the years to 31 December 2014, 2015, 2016, 2017 and 2018.
Also calculate the liability to the lessor at the end of each of these years and show how this liability should be split between current liabilities and non-current liabilities.
