How should wind corporation classify the lease

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Reference no: EM132757572

Question: Wind Corporation (a private company using ASPE) has a piece of machinery that they have agreed to lease to Storm Corporation (a public company using IFRS.) The machinery's cost is $300,000 and the fair value at the lease inception is $450,000. A residual value of $25,000 is expected at the end of the lease. This amount is not guaranteed by Storm Corporation. The annual lease payments are due at the start of the lease commencing July 1, 2020. The lease term is 5 years. Wind Corporation typically would sell the equipment instead of leasing, but Storm Corporation is a start up company in a risky business sector and is not able to receive financing from a bank. Wind Corporation is aware of this additional risk and set a high 15% interest rate to determine the rental payments. Storm is aware of this rate.

- Calculate the annual lease payment Wind Corporation should charge to Storm Corporation.

- How should Wind Corporation (the lessor) classify this lease? Support your answer.

- Prepare the journal entry that Wind Corporation should record on the start date of the lease July 1st,2020.

- How should Storm Corporation (the lessee) classify this lease. Support your answer.

- Prepare the journal entry that Storm Corporation should on the start date of the lease, July 1st 2020.

Reference no: EM132757572

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