Question

Read IFRS Insights (pp. 21-77 through 21-81 in the new text) Part 1 Required: In one...

Read IFRS Insights (pp. 21-77 through 21-81 in the new text)

Part 1

Required: In one or two sentences, summarize the main difference between IFRS vs. US lease accounting:

Finance and operating leases assets and liabilities are both capitalized under US lease accounting.

IFRS only accounts for finance leases which have higher interest expense in the beginning and decreases towards the end.

Part 2 (Application)

On January 1, 2017, a machine was purchased for $400,000 by Younger Leasing Co. The machine is expected to have a 10-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Juniper Inc. for 3 years on January 1, 2017, with annual rent payments of $69,560 due at the beginning of each year, starting January 1, 2017. The machine is expected to have a residual value at the end of the lease term of

$260,000, though this amount is unguaranteed.

Required:

US GAAP: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessarry 2017 journal entries related to the lease for Juniper.

US GAAP: What will Juniper report on the 2017 Balance Sheet regarding the lease?

IFRS: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessary 2017 journal entries related to the lease for Juniper.

IFRS: What will Juniper report on the 2017 Balance Sheet regarding the lease?

Summarize the differences between US GAAP and IFRS illustrated in this specific problem.

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Homework Answers

Answer #1

(a) Journal Entries as per IFRS : (For Juniper)

Present value annuity factor for 3 years at 6% = 2.6730

The present value of lease payment = $69560*2.6730 = $185934

First year Journal entry would be:

(1) Operating lease Right of use of asset Dr. 185934

To Operating lease liability 185934

(2) Lease Expense Dr. 69560

To Cash 69560

(3) Operating lease liability Dr. 69560

To Operating lease right of use of asset 69560

(b) Account Balance on Juniper Balance sheet as on 31 dec 2017.

Account balance for the Operating Lease Right of use :

Asset : 116374

Liability : 116374

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