Agassiz Company enters into a non-cancellable capital lease agreement on October 1, 2021, to lease equipment from Mission Ltd. The following data are relevant to the lease agreement:

• The term of the lease is 6 years, with no renewal option. Payments are due at the beginning of each year, with the first one due October 1, 2021.
• The minimum lease payments cover the $96,000 fair value of the equipment.
• The equipment has an economic life of 8 years. Both companies depreciate equipment on the straight-line basis.
• At the end of the 6-year lease, the equipment is fully expected to have a residual value of $15,000. This value is guaranteed by Agassiz and the company will cover any shortfall in the unlikely event that this value is not met.
• Agassiz's incremental borrowing rate is 12%. Mission wants a 10% rate of return.
• The collectability of the lease payments is reasonably predictable and there are no important uncertainties about costs that have not yet been incurred by the lessor.
• Both companies follow ASPE.

Instructions

a. Calculate the amount of the annual payment necessary for Mission to meet their desired rate of return. Calculate it to the penny. Important: Show your work or calculator inputs so that if you make a mistake, I can follow it through for the rest of the question to maximize possible marks. (2 marks)

b. Prepare the journal entries on the lessor, Mission's books that relate to the

• issue of the lease agreement on October 1, 2021;
• first payment on October 1, 2021;
• any year end accruals on December 31, 2021; and
• second payment on October 1, 2022.

Assuming that this is a direct financing type lease and that Mission purchased the equipment earlier at its fair value. (9 marks) c. Prepare the journal entry on Mission's books that relate to the issue of the lease agreement for October 1, 2021, assuming that this is a sales manufacture-dealer type lease, and that Mission purchased the equipment earlier for $75,000. (2 marks)

d. Briefly explain WHY (not when) in the interest of full disclosure in financial reporting, it is important that lessees capitalize some leases. (1 mark)