Reference no: EM132509797

Question - LePage Manufacturing Ltd. agrees to lease equipment to Labonté Ltée. on July 15, 2020. LePage follows ASPE and Labonté is a public company following IFRS 16.

The following information relates to the lease agreement.

1. The lease term is seven years, with no renewal option, and the equipment has an estimated economic life of nine years.

2. The equipment's cost is $420,000 and the asset's fair value on July 15, 2020, is $560,000.

3. At the end of the lease term, a payment to LePage, the lessor, in the amount of $80,000 is expected to be payable by Labonté, the lessee, under a residual value guarantee. Labonté depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments beginning on July 15, 2020.

5. LePage usually sells its equipment to customers who buy the product outright, but Labonté was unable to get acceptable financing for a cash purchase. LePage's credit investigation on Labonté revealed that the company's financial situation was deteriorating. Because Labonté had been a good customer many years ago, LePage agreed to enter into this lease agreement, but used a higher-than-usual 15% interest rate in setting the lease payments. Labonté is aware of this rate.

6. LePage is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Labonté has agreed to pay all executory costs directly to third parties.

7. LePage incurred legal costs of $2,500 in early July 2020 in finalizing the lease agreement.

Instructions -

a. Discuss the nature of this lease for both the lessee and the lessor.

b. Using (1) time value of money tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the annual rental payment that is required to obtain a return of 15% for LePage.

c. Prepare the journal entries that Labonté 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. Round amounts to the nearest dollar.

d. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Labonté's December 31, 2020 statement of financial position and statement of income, and where each amount would be reported.

e. Prepare the journal entries that LePage would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year end and does not use reversing entries. Round amounts to the nearest dollar.

f. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on LePage's December 31, 2020 statement of financial position and statement of income, and where each amount would be reported.

g. Comment briefly on the December 31, 2020 reported results in parts (d) and (f) above.