Reference no: EM132969223

LePage Manufacturing Ltd. agrees to lease machinery to Morand Corporation on July 15, 2020. Both companies report under ASPE. The following information relates to the lease agreement:

1. The lease's term is six years with no renewal option and the machinery has an estimated economic life of nine years.

2. The machinery's cost is $420,000 and the asset's fair value on July 15, 2020 is $560,000.

3. At the end of the lease term, the asset reverts to LePage, the lessor. At this time, the asset is expected to have a residual value of $80,000 and this value is guaranteed by Morand. Morand depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on July 15, 2020. LePage uses a 8% interest rate in setting the lease payments and Morand is aware of this rate. Equivalent financing for the machinery could have been obtained from Morand's bank at 8.5%.

5. Collectibility of lease payments is reasonably predictable, and no important uncertainties exist about costs yet to be incurred by LePage.

6. LePage charges $6,000 in executory costs over and above the amount of the annual lease payments to recover maintenance costs.

REQUIRED:

Each tab in the Excel template includes instructions on what must be prepared

Name of company
Term of lease
Economic life of machinery
Residual Value =0
Interest rate implicit in the lease 7.5%
Incremental borrowing rate 8%
Maintenance costs
Cost of machinery
Fair value of machinery
Date of start of lease
Company's year end date
Fair value of equipment at end of lease

Calculate the annual total payment required.
Future Value (FV)
Number of periods (N)
Rate
Present value (PV)
Type
Payment (PMT)

Total cash payment required:

Part b. Outline and calculate all criteria for classifying this lease for both the lessee and the lessor and decide how the lease should be accounted for each party.

Part c: i) Calculate the lease liability and prepare an amortization table for the lease from the perspective of the lessee. Use the effective interest method.

ii) Prepare all of the journal entries and any adjusting journal entries Morand would make in 2020 and 2021 related to the lease arrangement, assuming the company has a December 31 year end.

i) Prepare a net lease amortization table for the lease from the perspective of the lessor. Use the effective interest method.

ii) Prepare all of the journal entries and any adjusting journal entries LePage would make in 2020 and 2021 related to the lease arrangement, assuming the company has a December 31 year end. Use the Gross method of recording the lease transactions.

Identify the balances reported on the statement of cash flows of the lessee company under the direct method. Identify in which section of the statement the items will be shown.

Part f: The leased asset has a fair value of $50,000 at the end of the lease. Prepare the journal entry (ies) required at the end of the lease and to record the return of the leased asset for the lessee.

Bonus marks: Prepare the journal entry (ies) required at the end of the lease and to record the return of the leased asset to the lessor