Lessee co. and Lessor ltd. Both follow IFRS. Jan 1, 2021, they enter into a lease agreement that the lessee agreed to lease equipment for 5 years and to assume all costs and risks of ownership. The lease is effective Jan 1, 2021, and requires annual rental payments of $250,000 each January, starting Jan 1, 2021.

Lessees incremental borrowing rate is 8%, and the implicit interest rate used by lessor ltd is 8% and known to the lessee.

The equipments useful life is 10 years, and the estimated residual value is $32,500. Lessee and Lessor depreciate similar equipment using the straight-line method. At the end of the lease, Lessee will return the equipment to the lessor with an unguaranteed residual value of $32,500. Collectability of lease payments is assured. Lessee and Lessor year-end is Dec 31, of every year.

Instructions:

Assuming this is a Finance (capital), (Right for use asset) type lease for the Lessor and Lessee:

1. Prepare the Lessee Journal entries as of Jan 1, 2021 (show your calculation)
2. Prepare the journal entries for the lessee as of Dec 31, 2021
3. Prepare all the journal entries for the lessee for 2022
4. From the information, you have calculated and recorded, identify all balances related to the lease that would be reported on the Lessee Balance sheet on Dec 31, 2022