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 not guaranteed.

[1] Assume that NOD classifies the lease as a capital lease. Determine the fair value of the drone leased.

a.

$330,000.

b.

$353,600.

c.

$495,000.

d.

$518,600.

e.

None of the above.

[2] Assume that NOD classifies the lease as a capital lease. The company operates at a 20% gross profitability rate and sells the drones in the market at a price of $260,000 each. Further assume that the estimated residual value amounting to $23,600 was not guaranteed. Under these assumptions, the journal entry prepared by NOD to record the lease contract on January 1, 2019 would be

a.

DEBIT-Lease Receivable [$353,600]; DEBIT-Cost of Goods Sold [$196,003]; CREDIT-Sales Revenue [$248,003]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$93,600].

b.

DEBIT-Lease Receivable [$330,000]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$70,000].

c.

DEBIT-Lease Receivable [$260,000]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000].

d.

DEBIT-Lease Receivable [$353,500]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$93,600].

e.

None of the above.