Reference no: EM132756693

Question - Oriole Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2020. Annual rental payments of $42,000 are to be made at the beginning of each lease year (January 31). The insurance and repairs and maintenance costs are the lessee's obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Oriole's incremental borrowing rate is 10%. Oriole is unaware of the rate being used by the lessor. At the end of the lease, Oriole has the option to buy the equipment for $4,500, which is considerably below its estimated fair value at that time. The equipment has an estimated useful life of seven years with no residual value. Oriole uses straight-line depreciation on similar equipment that it owns, and follows IFRS 16.

Required -

1. Using time value of money tables, a financial calculator, or Excel functions, calculate the PV of the lease obligation.

2. Prepare the lease amortization schedule for the lease.

3. Prepare the journal entry that should be recorded on January 31, 2020, by Oriole.

4. Prepare any necessary adjusting journal entries at December 31, 2020, and the journal entry or entries that should be recorded on January 31, 2021, by Oriole. Oriole does not use reversing entries.

5. Prepare any necessary adjusting journal entries at December 31, 2021, and the journal entry or entries that should be recorded on January 31, 2022, by Oriole.