A lessor company, leased a drone to Worldz Information Network ltd., [WIN], a lessee, on January 1, 2019. The following information relates to the leased asset and the lease agreement:

Fair value of leased drone $Undisclosed

Lease 10 years

Useful life 15 years

Payment Due January 1

Payment frequency Annual

Annual Instalments starting January 1, 2019 $33,000

Estimated residual value at end of the lease, [as stated in the problem] $23,600

Interest rate implicit in the lease [unknown to the lessee] 7%

Interest rate incremental to the lessee 8%

Ownership of drone reverts to lessor at end of lease term

Year end for both companies December 31

Amortization method Straight line

Accounting standards used - NOD ASPE

- WIN IFRS

Assume that the residual value of the leased asset was guaranteed.

[1] The journal entry prepared by WIN to record the lease contract on January 1, 2019 would be

a.

DEBIT-Right of Use Assets [$342,000]; CREDIT-Obligation Under Capital Lease [$342,000].

b.

DEBIT-Right of Use Assets [$250,079]; CREDIT-Obligation Under Capital Lease [$250,079].

c.

DEBIT-Right of Use Assets [$239,147]; CREDIT-Cash [$239,147].

d.

DEBIT-Right of Use Assets [$330,000]; CREDIT-Obligation Under Capital Lease [$330,000].

e.

DEBIT-Right of Use Assets [$239,147]; CREDIT-Obligation Under Capital Lease

[2] What would be the amount of interest expense for 2019 if the residual value was guaranteed by the lessee? [Round to the nearest dollar]

a.

$17,366.

b.

$20,799.

c.

$26,400.

d.

$16,740.

e.

$19,032.

[3] The amount to be recorded as depreciation expense for 2019 if the residual value was guaranteed by the lessee would be [Round to the nearest dollar]

a.

$23,915.

b.

$15,943.

c.

$17,333.

d.

$22,648.

e.

$25,991.

[4] Working with the assumptions that the residual value was guaranteed by the lessee and that you are now at January 1, 2029. On that date, the fair market value of the equipment was determined to be $9,450. The required journal entry/entries prepared by WIN, to record all the effects of the lease ending would be

a.

DEBIT-Accumulated Depreciation - Leased Asset [$226,479]; DEBIT-Loss on Return of Leased Asset [$14,150]; DEBIT-Interest Payable [$1,748]; DEBIT Obligation Under Capital Lease [$21,852]; CREDIT-Right of Use Assets [$250,079]; CREDIT-Cash [$14,150].

b.

DEBIT-Loss On Return Of Leased Asset [$14,150]; CREDIT-Cash [$14,150].

c.

DEBIT-Obligation Under Capital Lease [$250,079]; DEBIT-Loss on Return of Leased Asset [$14,150]; CREDIT-Right of Use Assets [$250,079]; CREDIT-Cash [$14,150].

d.

DEBIT-Obligation Under Capital Lease [$21,852]; CREDIT-Right of Use Assets [$7,702]; CREDIT-Cash [$14,150].

e.

No journal entry required.