Question
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
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.
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