Assignment #5 - Lease

Questions #1- Lessee Accounting

Oakland Inc. signs a contract with Ashton Ltd. on January 1, 2021 to lease equipment to Ashton. The following information relates to the agreement.

• The term of the non-cancellable lease is five years, with no renewal option.
• The equipment has an estimated economic life of seven years.
• The fair value of the equipment on January 1, 2021 is $500,000.
• The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $100,000, which is not guaranteed.
• Ashton Limited assumes direct responsibility for all executory costs, which include the following annual amounts: $900 to Rocky Mountain Insurance Ltd. for insurance and $1,600 to James Township for property taxes.
• The agreement requires equal annual rental payments from Ashton to Oakland beginning on January 1, 2021.
• The lessee's incremental borrowing rate is 10%.
• The lessor's implicit rate is 8% and is not known to the lessee.
• Ashton Limited uses the straight-line depreciation method for all equipment
• Round all amounts to the nearest dollar.

Instructions

1. Show the calculations that Oakland, the lessor, used to arrive at the lease payment amount of $100,169.
2. Assume lessee Ashton follows IFRS, what kind of lease is it for Ashton? Why?
3. Prepare an amortization schedule for Ashton for the lease. Use Excel and round all amounts to the nearest dollar. (Note: you may find the =round formula helpful for rounding in Excel.)
4. Prepare all of Ashton's journal entries for 2021 and 2022 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume that the lessee's annual accounting period ends on December 31.
5. Show how the lease is reported in the income statement of 2021 and the balance sheet of December 31, 2021.
6. Had Ashton followed ASPE, what kind of lease would it have been for Ashton? Why?
7. Prepare all of Ashton's journal entries for 2021 and 2022 to record the lease assume that Ashton follows ASPE.