Determine the amount of each lease payment

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Reference no: EM132795799

Question 1 - Lessee Ltd. agreed to a non-cancellable lease for which the following information is available:

The asset is new at the inception of the lease term and is worth $160,000.

Lease term is four years, starting 1 January 2020.

Estimated useful life of the leased asset is six years.

The residual value of the leased asset will be $30,000 at the end of the lease term. The residual value is guaranteed by Lessee.

The straight-line method is used to depreciate the asset. The estimated useful life of the asset is estimated to be 7 years.

Lessee's incremental borrowing rate is 10%.

Four annual lease payments will be made each 1 January during the lease term, and the first payment, due at inception of the lease term, is $43,130, including $5,500 of maintenance costs.

Lessee has a 31 December fiscal year-end.

Lessee follows IFRS.

Required -

1. What type of lease is this to the Lessee? Support your answer.

2. Complete the lease amortization table.

3. Prepare the journal entries required by Lessee Limited in 2020.

4. Prepare the journal entry for Lessee Limited at the end of the lease. The assets fair value at the end of the lease term is $25,000.

Question 2 - Canada Inc - On 1 January 2020, Canada Inc. acquired an asset on behalf of Molty Ltd. for $100,000. Canada Inc and Molty enter into a six-year lease for the asset, effective 1 January 2020, with equal payments at the beginning of each lease year. Canada Inc will earn 8% (before taxes) on the lease. Canada Inc has a 31 December fiscal year-end and follows IFRS.

Required -

1. Determine the amount of each lease payment.

2. Prepare all the journal entries for Canada Inc. for 2020 assuming the gross method is used.

Reference no: EM132795799

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