Reference no: EM132931010
Question - Marshall Enterprises agrees to lease equipment to Burlington Corporation on June 30, 2020. Burlington uses IFRS 16 and Marshall uses ASPE. The following information relates to the lease agreement.
1. The lease term is five years, with no renewal option, and the equipment has an estimated economic life of six years.
2. The equipment's cost is $330,000 and the asset's fair value on June 30, 2020, is $435,000.
3. At the end of the lease term, the asset reverts to Marshall, the lessor. The asset is expected to have a residual value of $45,000 at this time, and this value is guaranteed by Burlington. Burlington depreciates all of its equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on June 30, 2020.
5. Marshall's implicit rate is 11% and this is known to Burlington. Burlington's incremental rate is 10%.
6. Marshall is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Burlington has agreed to pay all executory costs directly to third parties.
7. Marshall incurred legal costs of $5,000 in early June 2020 in finalizing the lease agreement.
Required -
(a) Discuss the nature of this lease for both the lessee and the lessor.
(b) Using time value of money tables, a financial calculator, or computer spreadsheet functions, calculate the amount of the annual rental payment that is required assuming IFRs 16 is applied for calculating the payment. Show your work.
(c) Prepare the journal entries that Burlington would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year end and that it does not use reversing entries.
(d) From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Burlington's December 31, 2020 balance sheet and income statement, and where each amount would be reported.
(e) Prepare the journal entries that Marshall would make in 2020 and 2021related to the lease arrangement, assuming that the company has a December 31 fiscal year end and does not use reversing entries.
(f) From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Marshall's December 31, 2020 balance sheet and income statement, and where each amount would be reported.
(g) Comment briefly on the December 31, 2020 reported results in parts (d) and (f) above.