Maple Leaf Manufacturing Ltd. agrees to lease equipment to Labrador Ltd. on July 1, 2020. Maple Leaf follows ASPE and Labrador is a public company following IFRS 16.

The following information relates to the lease agreement.

1. The lease term is seven years, with no renewal option, and the equipment has an estimated economic life of nine years.
2. The equipments cost is $420,000 and the assets fair value on July 1, 2020, is $560,000.
3. At the end of the lease term, a payment to Maple Leaf, the lessor, in the amount of $80,000 is expected to be payable by Larador, the lessee, under a residual value guarantee. Labrador depreciates all of its equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments beginning on July 1, 2020.
5. Maple Leaf usually sells its equipment to customers who buy the product outright, but Labrador was unable to get acceptable financing for a cash purchase. Maple Leafs credit investigation on Labrador revealed that the companys financial situation was deteriorating. Because Labrador had been a good customer many years ago, Maple Leaf agreed to enter into this lease agreement but used a higher-than-usual 15% interest rate in setting the lease payments. Labrador is aware of this rate.
6. Maple Leaf is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Labrador has agreed to pay all executory costs directly to third parties.
7. Maple Leaf incurred legal costs of $2,500 in early July 2020 in finalizing the lease agreement.

Instructions:

1. Discuss the nature of this lease for both the lessee and the lessor.

b. Using (1) time value of money tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the annual rental payment that is required to obtain a return of 15% for Maple Leaf.

c. Prepare the journal entries that Labrador would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year-end and that it does not use reversing entries. Round amounts to the nearest dollar.

d. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Labradors December 31, 2020, statement of financial position and statement of income, and where each amount would be reported.

e. Prepare the journal entries that Maple Leaf would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year-end and does not use reversing entries. Round amounts to the nearest dollar.

f. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Maple Leafs December 31, 2020, statement of financial position and statement of income, and where each amount would be reported.

g. Comment briefly on December 31, 2020, reported results in parts (d) and (f) above.