Lease Accounting 1. Colorado Inc. leased a new front-end loader to Cho Construction under a 4-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments of $30,507 each January 1, starting January 1, 2020. The front-end loader has an estimated life of 9 years, a fair value of $175,000, and a cost to Colorado of $140,000. The estimated fair value of the front-end loader is expected to be $36,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Cho uses straight-line amortization for all similar leased assets, and Colorado depreciates the asset on a straight-line basis with a salvage value of $10,000. Both Colorado and Cho adjust and close books annually on December 31. Collectability of the lease payments is probable. Chos incremental borrowing rate is 9%, and Colorados implicit interest rate of 8% is unknown to Cho.

2. Royals Inc. leases a forklift to Colorado, Inc on January 1, 2020. The lease agreement called for annual rental payments of $8,648 at the beginning of each year of the 3-year lease. The forklift has a fair value of $35,000, a book value of $20,000, and an economic useful life of 5 years after which the residual value will be zero. Both parties expect a residual value of $12,500 at the end of the lease term, though this amount is not guaranteed. Royals set the lease payments with the intent of earning a 6% return, and Colorado is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

3. Brigger Construction Inc. manufactures a front loader with an estimated life of 10 years and leases it to Colorado for a period of 8 years. The normal selling price of the machine is $169,579, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $8,000. Old Mill will pay rents of $25,000 at the beginning of each year. Brigger incurred costs of $131,000 in manufacturing the machine and $4,500 in legal fees directly related to the signing of the lease. Brigger has determined that the collectability of the lease payments is probable and that the implicit interest rate is 6%. Colorado has an incremental borrowing rate of 6% and an expected residual value at the end of the lease of $6,000.

Instructions (Please prepare using excel. Format responses and schedules in your workbook using Page Layout. Meaning, it should be easy to read and print. Be mindful of your grammar in your responses. Round all numbers to the nearest dollar.)

a) Prepare lease classification tests, measurement schedules, and amortization schedules

b) Identify the type of leases involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

c) Prepare all the entries related to the lease contracts and leased assets for the year 2020 for the lessee and lessors.

d) Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2020. e) Suppose Colorado incurred $3,000 of document preparation costs after the execution of lease #3. How would the initial measurement of the lease liability and right-of-use asset be affected? f) Explain how a bargain renewal option for one extra year at the end of the lease term would change the accounting of lease #2 for Polar. g) Under IFRS, how would your response from (d) change for lease #1?