Oakridge Leasing Corporation, which uses private enterprise GAAP, signs an agreement on January 1, 2011, to lease equipment to LeBlanc Limited. The following information relates to the agreement:
1. The term of the non-cancellable lease is five years, with no renewal option. The equipment has an estimated economic life of six years.
2. The asset’s fair value at January 1, 2011, is $80,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, which is not guaranteed.
4. LeBlanc Limited assumes direct responsibility for all executory costs, which include the following annual amounts: $900 to Rocky Mountain Insurance Corporation for insurance and $1,600 to James County for property taxes.
5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2011.
6. The lessee’s incremental borrowing rate is 11%. The lessor’s implicit rate is 10% and is known to the lessee.
7. LeBlanc Limited uses the straight-line depreciation method for all equipment.
8. LeBlanc uses reversing entries when appropriate.
Instructions
Answer the following, rounding all numbers to the nearest cent.
(a) Use a computer spreadsheet to prepare an amortization schedule for LeBlanc Limited for the lease term.
(b) Prepare all of LeBlanc’s journal entries for 2011 and 2012 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume that the lessee’s annual accounting period ends on December 31.
(c) Provide the required note disclosure for LeBlanc Limited concerning the lease for the fiscal year ending December 31, 2012.
(d) Would this lease be considered a capital lease if the company reported under IFRS? Would the note disclosure required in (c) above need to be modified under IFRS?