Atlanta Tours Company entered into a five-year lease on January 1, Year 1 with Duck Boats Inc. for a customized duck boat. Duck Boats will provide a vehicle to Atlanta Tours Company with the words Gone with the Wind carved into the sides.

Following are the terms of the lease arrangement:

A. Fair value of the wagon at the inception of the lease is $10,000

B. There is an eight-year estimated economic life

C. Estimated (unguaranteed) residual value is $3,500. Atlanta Tours Company does not absorb any gains or losses in the fluctuations of the fair value of the residual value.

D. Annual lease payments of $2,000 are due on January 1 of each year. The implicit interest rate in the lease is 6 percent.

E. Atlantas incremental borrowing rate is 6.5 percent. 6.

F. There is an option to purchase at the end of lease-term for $4,000.

G. The lease is noncancelable and may not be extended.

Required:

1. What is present value of minimum lease payment under U.S. GAAP and IFRS?

2. Discuss whether Atlanta Tours Company should classify this lease as an operating lease or as a finance lease under (a) IFRS and (b) U.S. GAAP .

3. Prepare journal entries for Atlanta Tour Company for Year 1 under both IFRS and GAAP.