Accounting Problem

Background Information

On January 1, 2020,CullumberCorp., which uses IFRS, signs a10-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 $76,676beginning on January 1, 2020.

2.The lathe's fair value on January 1, 2020, is $520,000.

3.The lathe has an estimated economic life of12years, with an unguaranteed residual value of $17,000.CullumberCorp. 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.Cullumber's incremental borrowing rate is9% per year. The lessor's implicit rate is not known byCullumberCorp.

6.The yearly rental payment includes $2,339.81of executory costs related to insurance on the lathe.

Assume this is a manufacturer/dealer lease.

Instructions

Assume thatCullumber's fiscal year-end is May 31. Prepare the journal entries onCullumberCorp.'s books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the calendar years 2020 and 2021.Cullumberdoes not Prepare reversing entries.(Credit account titles are automatically indented when the amount is entered.Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 52.75.) Use Template 1.png. A list of Accounts is Provided Below.

List of Accounts

• Accounts Payable
• Accounts Receivable
• Accumulated Depreciation - Leased Buildings
• Accumulated Depreciation - Buildings
• Accumulated Depreciation - Leased Equipment
• Accumulated Depreciation - Rental Equipment
• Accumulated Depreciation - Right-of-Use Asset
• Accumulated Depreciation - Software under Lease
• Accumulated Depreciation - Vehicles
• Accumulated Depreciation - Vehicles under Lease
• Amortization Expense
• Buildings
• Buildings under Lease
• Cash
• Cost of Goods Sold
• Deferred Profit on Sale-Leaseback
• Depreciation Expense
• Equipment
• Equipment Acquired for Lessee
• Equipment under Lease
• Insurance Expense
• Insurance Payable
• Insurance Revenue
• Interest Expense
• Interest Income
• Interest Payable
• Interest Receivable
• Inventory
• Land Rental Expense
• Land under Lease
• Lease Liability
• Lease Receivable
• Legal Expense
• Loss on Lease
• Low Value Lease Expense
• No Entry
• Obligations under Lease
• Operating Expenses
• Prepaid Expenses
• Prepaid Insurance
• Prepaid Rent
• Property Tax Expense
• Rent Expense
• Rental Equipment
• Rent Payable
• Rent Receivable
• Rent Revenue
• Repairs and Maintenance Expense
• Right-of-Use Asset
• Sales Revenue
• Selling Expenses
• Short-Term Lease Expense
• Software under Lease
• Unearned Interest Income
• Unearned Rent Revenue
• Vehicles
• Vehicles under Lease

Template 1.png

Date Account Titles and Explanation Debit Credit 1/1/20 ( To record lease payment.) 5/31/20 [ To record depreciation expense.] 5/31/20 (To record interest.] 12/31/20 (To record expired insurance) 1/1/21 (To record lease payment.) 5/31/21 [ To record depreciation expense.] 5/31/21 (To record interest.] 12/31/21 [To record expired insurance)