Problem 216 The following facts pertain to a noncancelable l

Problem 21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Blossom Company, a lessee. Inception date Annual lease payment due at the beginning of January 1, 2017 $117,006 $53,000 each year, beginning with January 1, 2017 Residual value of equipment at end of lease term, guaranteed by the lessee Lease term 6 years 6 years Economic life of leased equipment Fair value of asset at January 1, 2017 Lessor\'s implicit rate Lessee\'s incremental borrowing rate 554,000 13% 13% The lessee assumes responsibility for all executory costs, which are expected to amount to $5,200 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $53,000. The lessee uses the straight-line depreciation method for all equipment.

Solution

According to IFRS, if present value of minimum lease payment is < 90% fair value then the lease is classified as an operating lease. Here the lease will be classified as operating lease because of the same.

N=6, PMT = -$122,206 ($117,006 + $5,200), FV = $53,000; PV = $463,068 < $498,600 (0.9*$554,000)

As a result, the interest, reduction in lease liability and lease receivable will be nil, we\'ll only have annual lease rent of $122,206 for 6 consecutive years

Journal Entry Lesse

12/31/2017 : Rent paid $122,506; Debit Rent Account; Credit cash Account

12/31/2018 : Rent paid $122,506; Debit Rent Account; Credit cash Account