Castle Leasing Corporation, which uses IFRS, signs a lease agreement on January 1, 2011, to lease electronic equipment to Wai Corporation, which also uses IFRS. The term of the non-cancellable lease is two years and payments are required at the end of each year. The following information relates to this agreement.
1. Wai Corporation has the option to purchase the equipment for $13,000 upon the termination of the lease.
2. The equipment has a cost and fair value of $135,000 to Castle Leasing Corporation. The useful economic life is two years, with a residual value of $13,000.
3. Wai Corporation is required to pay $5,000 each year to the lessor for executory costs.
4. Castle Leasing Corporation wants to earn a return of 10% on its investment.
5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs that have not yet been incurred by the lessor.
Instructions
(a) Using time value of money tables, a financial calculator, or computer spreadsheet functions, calculate the lease payment that Castle Leasing would require from Wai Corporation.
(b) What classification will Wai Corporation give to the lease? What classification will be given to the lease by Castle Leasing Corporation?
(c) What classification would be adopted by Wai Corporation and Castle Leasing Corporation had they both been using private enterprise GAAP?
(d) Prepare a lease amortization table for Castle Leasing for the term of the lease.
(e) Prepare the journal entries on Castle Leasing’s books to reflect the payments received under the lease and to recognize income for the years 2011 and 2012.
(f) Assuming that Wai Corporation exercises its option to purchase the equipment on December 31, 2012, prepare the journal entry to reflect the sale on Castle Leasing’s books.
(g) What amount would Wai Corporation capitalize and recognize as a liability on signing the lease? Explain.