On January 1, 2023, Vick Leasing Inc., a lessor that uses IFRS, signed an agreement with Rock River Inc., a lessee, for the use of a compression system. The system cost $415,000 and Vick purchased it from Manufacturing Solutions Ltd. specifically for Rock River. Annual payments are made each January 1 by Rock River. In addition to making the lease payment, Rock River also reimburses Vick $4,000 each January 1 for a portion of the repairs and maintenance expenditures, which cost Vick a total of $7,000 per year. At the end of the five-year agreement, the compression equipment will revert to Vick and is expected to have a residual value of $25,000, which is not guaranteed. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs that have not yet been incurred by Vick.

Instructions

a. Assume that Vick has a required rate of return of 8%. Calculate the amount of the lease payments that would be needed to generate this return on the agreement if payments were made each (1) January 1 and (2) December 31. Show calculations using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel functions.

b. Use Excel to prepare an amortization schedule that shows how the lessor’s net investment in the lease receivable will be reduced over the lease term if payments are made each:

1. January 1

2. December 31

Round all amounts to the nearest cent using the ROUND formula. For part (1), use the result of the calculation in part (a) from a financial calculator or Excel. For part (2) only, round annual payments to the nearest dollar.

c. Assume that the payments are due each January 1. Prepare all journal entries and adjusting journal entries for 2023 and 2024 for the lessor, assuming that Vick has a calendar year end. Include the payment for the purchase of the equipment for leasing in your entries and the annual payment for repair and maintenance. Round all amounts to the nearest dollar.

d. Prepare a partial statement of financial position at December 31, 2023, showing the net investment in leases for Vick. Provide the proper classification and assume that the payments are due each January 1.

e. Provide the note disclosure concerning the lease that would be required for Vick at December 31, 2024. Assume that payments are due each January 1.