On January 1, 2023, Maleki Corp., which uses IFRS, signs a 10-year, non-cancellable lease agreement to lease a specialty lathe from Liu Inc. The following information concerns the lease agreement.

1. The agreement requires equal rental payments of $73,580 beginning on January 1, 2023.

2. The lathe’s fair value on January 1, 2023, is $450,000.

3. The lathe has an estimated economic life of 12 years, with an unguaranteed residual value of $12,000. Maleki depreciates similar equipment using the straight-line method.

4. The lease is non-renewable. At the termination of the lease, the lathe reverts to the lessor.

5. Maleki’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Maleki.

6. The yearly rental payment includes $2,470.29 of executory costs related to insurance on the lathe.

Instructions

a. Using (1) factor tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the right-of- use asset and lease liability and prepare the initial entry to reflect the signing of the lease agreement.

b. Prepare an amortization schedule for the term of the lease to be used by Maleki. Use Excel. Round to the nearest cent.

c. Prepare the journal entries on Maleki’s books to record the payments and expenses related to this lease for the years 2023 and 2024 as well as any adjusting journal entries at its fiscal year ends of December 31, 2023 and 2024. Maleki does not use reversing entries.

d. Prepare Maleki’s required note disclosure on the lease for the fiscal year ended December 31, 2024.

e. In Excel, prepare a waterfall graph outlining the decrease in the lease liability throughout the term of the lease.