Exercise 20-8 (Part Level Submission)

Cullumber Mining Corporation, a public company whose stock trades on the Toronto Stock Exchange, uses IFRS. The vice-president of finance has asked you, the assistant controller, to prepare the companys current accounting of a lease. The lease was signed by Cullumber on April 1, 2020, with Bertrand Ltd. for a piece of excavation equipment. The following information relates to the agreement.

1.		The term of the non-cancellable lease is 3 years, with a renewal option of one additional year at the annual rate of 140% of the initial payment. The equipment has an estimated economic life of 10 years.
2.		The assets fair value at April 1, 2020 is approximately $1.20 million.
3.		The asset will revert to Bertrand at the end of the initial term of the lease, or at the end of the renewal period should Cullumber exercise that option. The excavation equipment is expected to have a fair value of $645,000 on March 31, 2022 and $545,000 on March 31, 2023, which is not guaranteed.
4.		Cullumber assumes direct responsibility for all executory costs for the excavation equipment.
5.		The initial term of the lease agreement requires equal annual rental payments of $130,000 to Bertrand, beginning on April 1, 2020.
6.		The lessees incremental borrowing rate is 13%. Bertrands implicit rate is 12% and is known to Cullumber.
7.		Cullumber has a calendar year end.

You found out that it has always been Cullumbers intention to exercise the renewal period because of the nature of the asset. Cullumbers operations manager says that there is a 85% chance that the renewal period will be exercised.

(a) Determine the amount of the liability for lease payments at the signing of the lease.