iScream, Ltd., manufactures industrial refrigeration equipment using the latest technology. One of its

products is the iEzBox, a digitally controlled industrial freezer which it produces at a cost of $195,100

and sells at $210,000 to distributors of vegetable and dairy products. The firm also leases out the same

equipment to users on the following terms:

Annual lease rental instalments are $37,282.66 which are due at the beginning of each year and

do not include any executory costs. The first instalment is to be paid by the lessee upon the

signing of the lease contract.

Annual maintenance is $8,000 and annual property tax is $9,500. The lessee pays both at the end

of each year.

The economic life of the asset is ten years.

The lease term is seven years.

iScream has factored a residual value of only $10,000 in determining and charging the lease

rental instalment.

The lessor's 9% implicit rate is known to all lessees.

iScream uses ASPE for maintaining its accounts. It depreciates (amortizes) similar machinery

owned using the declining balance method which more closely approximates CCA (capital cost

allowance) allowed for income tax purposes.

On January 1, 2017, iScream leased a new iEzBox to Beenz, Inc., on the terms described above. Beenz

amortizes similar machinery owned using the straight-line method, has been using IFRS for maintaining

its accounts, has no material uncertainties regarding future costs to be incurred under the lease and

collectability is reasonably assured. It's incremental borrowing rate is 12% .

REQUIRED:

a] Determine how iScream (lessor) would classify the lease and briefly state your reasons.

b] Prepare the journal entries required, assuming for this question that the residual value of the

equipment is unguaranteed, to record all the lease transactions in the books of the lessor on January

1, 2017.

c] What would the minimum lease instalment be if the lease property was not guaranteed?

d] Prepare the journal entries in the books of the lessor, to record all the effects related to the lease on

December 31, 2017.

e] Now assume for this question only that the lessor had some serious doubts about the certainty of the

collection of the lease payments from the lessee in the future. Under these circumstances:

1] How would the lease be classified by the lessor?

2] Also prepare the journal entry which the lessee would make to record the payment of the first

instalment on January 1, 2017, assuming that the lease was to be classified as an operating

lease?

For the following Questions (f) - (g), assume that Beenz does not consider the residual value to be a

bargain purchase. Further, it also does not guarantee the residual value.

f] Determine how Beenz would classify the lease and briefly state your reasons.

g] Prepare the journal entry required to record just the lease transaction in the books of the lessee on

January 1, 2017. Show your computations for determining the cost of the leased property to be

recorded in Beenz's books.

h] Given the assumption in [g] above, prepare the journal entries in Beenz's books of accounts to record

all the effects related to the lease on December 31, 2017.

For the following Questions (i) - (k), assume that Beenz does consider the residual value to be a

bargain purchase and has decided to exercise this option.

i] Determine the cost of the leased property to be recorded in Beenz's books.

j] What would be the amount of the depreciation which Beenz would record for 2017?

k] The lease contract would end on January 1, 2024. Prepare the journal entry required in the books of

Beenz to record the settlement of the lease contract on this date.

l] Assume ONLY FOR THIS QUESTION that the residual value was not considered to be a

bargain purchase and that the residual value was guaranteed by Beenz at a value of $10,000.

What would be the amount of the cost of the leased property which Beenz would record in its books

of accounts on January 1, 2017