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Determine whether ctc should record this lease

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Reference no: EM132316765

Question

On January 1, 2009, Creative Transportation Company

(CTC) entered into a lease with Bubba's Antique Cars (BAC) for an antique roadster with the following terms:

· Fair value of the antique roadster at the inception of the lease is $20,000.

· Lease term of seven years.

· Estimated residual value (unguaranteed) is $5,124. CTC does not absorb any gains or losses in the fluctuations of the fair value of the residual value.

· End-of-term purchase option of $8,000.

· Implicit annual interest rate of 5% (disclosed to CTC by BAC).

· Lessee's incremental annual borrowing rate is 4%.

· Payments of $3,000 per year due on December 31.

· Ten year remaining economic life.

· Depreciation policy is the straight-line method.

· Ownership is not transferred at the end of the lease term.

· The lease may not be extended.

Required:

Part I.

Determine whether CTC should record this lease as an operating or finance lease under (a) IFRS and (b) U.S. GAAP.

Part II.

Regardless of your answer to Part I, prepare journal entries for 2009 assuming the lease is capitalized.

Part III.

Assume CTC had an incremental borrowing rate of 5.25%. Would this change the results of the lease classification under IFRS?

Note: Round amounts to the nearest whole dollar.

Reference no: EM132316765

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