On October 1, 20X1, Brady Consulting leases unmodified equipment from Damon Corporation. The lease covers four years and requires lease payments of $73,046, beginning on September 30, 20X2. The unguaranteed residual value is $200,000. On October 1, 20X1, the equipment has an approximate fair value of $400,000 and an estimated life of 12 years. The implicit rate in the lease is 7%. Brady’s fiscal year ends on December 31, and the company depreciates its other equipment on a straight-line basis.

Required:

1. Explain why this is an operating lease for Brady Consulting.

2. Prepare an amortization table for the lease.

3. Prepare Brady’s journal entries from the inception of the lease through September 30, 20X3. Be sure to make any necessary reclassifications to current liabilities at the end of each reporting period.

4. Compute and label the amounts to be shown on the balance sheet and income statement for the years ended December 31, 20X1, and December 31, 20X2.

5. Show how the income statement and balance sheet would differ for 20X1 and 20X2 if the lease were accounted for under IFRS 16.

6. Explain how the income statement and balance sheet would differ if the lease were treated as a short-term lease (i.e., the operating lease accounting prior to ASC Topic 842).