Lessee co. and Lessor ltd. Both follows IFRS. Jan 1, 2020, 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 effective Jan 1, 2020, and requires annual rental payments of $250,000 each January, starting Jan 1, 2020.

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

The equipment useful life is 10 years and the estimated residual value is $32,500 unguaranteed. Lessee and Lessor depreciate similar equipment’s using straight line method. At the end of the lease, there is a bargain purchase option amount of $25,000. Collectability of lease payments is assured, also there is assurance that the lessee will exercise the bargain purchase option at the end of the lease term. 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:

a-      Prepare the Lessor Journal entries as of Jan 1, 2020 (show your calculation)

b-     Prepare the Lessee Journal entries as of Jan 1, 2020 (show your calculation)

c-      Prepare the journal entries for the lessee as of Dec 31, 2020

d-     Prepare the journal entries for the lessor as of Dec 31, 2020

e-      Prepare all the journal entries that the lessee will prepare for 2021

f-      Prepare all the journal entries that the lessee will prepare for 2022

g-     Show the proper presentation (Balance Sheet /Statement of Financial Position), thet the lessee will present at Dec 31, 2023