b$.$ Prepare all necessary journal entries and adjusting journal entries for ID under the Precision Inc.

option, from lease inception on January $1,2021,$ through to December $31,2021,$ excluding the $$1,500$

annual upgrade.

c$.$ Prepare an amortization schedule using Excel that would be suitable for the lease term in the

Graphic Inc. option. Round amounts to the nearest dollar.

d$.$ Prepare all necessary journal entries and adjusting journal entries for ID under Graphic's option,

from lease inception on Jahuary $1,2021,$ through to January $1,2022,$ excluding the $$1,500$ annual

upgrade. Round to the nearest dollar.

e$.$ Summarize and contrast the effects on ID's financial statements for the year ending December $31,$

$2021,$ using the entries prepared in parts $($b$)$ and $($d$)$ above. Include in your summary the total differ$-$

ential cash outflows that would be made by ID during $2021$ under each option.

f$.$ Discuss the qualitative considerations that should enter into ID decision on which lease to sign.

Which lease do you think will most likely be chosen by ID$?$ Why?

g$.$ Digging Deeper What are the long$-$term and short$-$term implications of the choice between these

two options? How do these implications support the direction taken in IFRS $16$ concerning the

accounting for leases?

P$20\mathrm{.}2$ You have just been hired as the new controller of SWT Services Inc., and on the top of the stack ofP$20)1$ Interior Design Inc. $($ID$)$ is a privately owned business that provides interior decorating options for

comsumers. ID follows ASPE. The software that it purchased six years ago to present clients with designs

that are unique to their offices is no longer state of the art, and ID has to make a decision on replacing its

software. The company has two options:

Enter into a lease agreement with Precision Inc. whereby ID makes an upfront lease payment of

$$12,000$ on January $1,2021,$ and annual payments of $$4,500$ over the next five years on each Decem$-$

ber $31.$ At the end of the lease, ID has the option to buy the software for $$5,000.$ The first annual lease

payment is on December $31,2021.$

Enter into a lease agreement with Graphic Inc. on January $1,2021,$ whereby ID makes five annual

lease payments of $$6,500,$ beginning on January $1,2021.$ ID may purchase the software at the end of

the lease period for $$200.$ This is considered a bargain price compared with the offer $$$5,000$ in the

proposal from Precision Inc.

Under both options, the software will require annual upgrades that are expected to cost $$1,500$ per

year. These upgrade costs are in addition to the lease payments that are required under the two indepen$-$

dent options. Because this additional cost is the same under both options, $1D$ has decided to ignore it in

making its choice.

The Precision agreement requires a licensing fee of $$1,000$ to be renewed annually. If ID decides on

the Precision option, the licensing fee will be included in the annual lease payment of $$4,500.$ Both Pre$-$

cision Inc. and Graphic Inc. offer software programs of similar quality and ease of $$ se$,$ and both provide

adequate support and training. The software under each offer is expeted to be used for up to eight years,

although this depends to some extent on technological advances in future years. Both offers are equiva$-$

lent in terms of the product and service.

It is now early October $2020,$ and ID hopes to have the software in place by its fiscal year end of

December $31,2020.$ ID is currently working on preparing its third$-$quarter financial statements, which

its bank is particularly interested in seeing in order to ensure that ID is respecting its debt to equity

ratio covenant in its loan agreement with the bank. The interest rate on the bank loan, which is ID's

only source of external financing, is $10\%$ per year. ID would have preferred to be able to buy rather than

lease the software, but the expected purchase price of $$30,000$ exceeds the limits that the bank set for

ID's borrowing.

Instructions

a$.$ Using $(1)$ tables, $(2)$ a financial calculator, or $(3)$ Excel functions, calculate the PV of the future min$-$

imum lease payments under each option. Discuss the nature of the lease arrangement under each

of the two lease options offered to ID and the corresponding accounting treatment that should be

applied.