Question

The following facts are for a non-cancellable lease agreement between Alpha Corporation and Beta Corporation, a lessee:

Inception Date	July 1, 2018
Annual lease payment due at the beginning of each year, starting July 1, 2018	$20,066.26
Purchase option price at end of lease term reasonably certain to be exercised by Beta	$4,500.00
Lease term	5 years
Economic life of leased equipment	10 years
Lessor’s cost	$60,000.00
Fair value of asset at July 1, 2018	$88,000.00
Lessor’s implicit rate	9%
Lessee’s incremental borrowing rate	9%

The collectability of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. The lessee assumes responsibility for all executory costs. Both Beta and Alpha use IFRS 16.

Required:

1. Calculate the amount of the right-of-use asset and lease liability.

2..Discuss the nature of this lease to Beta Corporation, the lessee.

3. Discuss the nature of this lease to Alpha Corporation, the lessor.

4. Prepare a lease amortization schedule for the lease obligation using a computer spreadsheet for Beta Corporation for the five-year lease term.

5. Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2018 and 2019. Beta’s annual accounting period ends on December 31, and Beta does not use reversing entries

Answer 1

1.

Right to Use Assets		88,000.01
Lease Obligation		67,933.75

Year	Payments	PV Factor	Present value
0	20,066.26	1	20,066
1	20,066.26	0.91743	18,409
2	20,066.26	0.84168	16,889
3	20,066.26	0.77218	15,495
4	20,066.26	0.70843	14,216
5	4,500.00	0.64993	2,925
			88,000

2.

The lease will be classified as Finance Lease:

• The Lease has Bargain Purchase Option
• Present Value of Minimum Lease Payments is Equal to the Fair Value of Assets

3.

The Lease agreement as Bargain Purchase Price and No uncertainty about the collection of Lease Rentals so the lease Qualifies to be classified as Direct-Financing Type Lease.

But since the initial amount of PV of Minimum Lease Receivable is more than the Cost of the assets the Lease is Sale type Lease.

4.

Amortization Table
Year	Payments	Interest Expesnes	Lease Obligation
0	20,066.26	-	67,933.75
1	20,066.26	6,114.04	53,981.53
2	20,066.26	4,858.34	38,773.60
3	20,066.26	3,489.62	22,196.97
4	20,066.26	1,997.73	4,128.44
5	4,500.00	371.57	0.00

5.

Date	Account Description	Debit	Credit
1-Jul-18	Right to Use Assets	88,000
	Lease Obligation		67,933.74
	Cash		20,066.26
31-Dec-18	Interest Expesnes	3,057.02
	Lease Obligation		3,057.02
31-Dec-18	Depreciation	4,400.00
	Accumulated depreciation		4,400.00
1-Jul-19	Interest Expesnes	3,057.02
	Lease Obligation	17,009.24
	Cash		20,066.26
31-Dec-19	Interest Expesnes	2,429.17
	Lease Obligation		2,429.17
31-Dec-19	Depreciation	8,800.00
	Accumulated depreciation		8,800.00

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