Question
Moose Jaw Manufacturing Ltd. leases a machine to Regina Corporation. The term of the lease begins on July 1, 2020. Semi-annual lease payments are made
Moose Jaw Manufacturing Ltd. leases a machine to Regina Corporation. The term of the lease begins on July 1, 2020. Semi-annual lease payments are made at the end of each lease period, on June 30 and December 31. The lease contains no renewal options, and the equipment reverts to Moose Jaw at the end of the lease. Assume that both Moose Jaw and Regina follow ASPE. Details of the lease are as follows:
$ 344,277 | Fair value of machine at lease inception |
$ 271,979 | Moose Jaw's cost of manufacturing the machine |
$ 11,798 | Amount of guaranteed residual value |
6% | Regina's incremental borrowing rate |
9% | Interest rate implicit in lease |
5 | Lease term (in years) |
7 | Estimated economic life of machine (in years) |
Moose Jaw has determined that the collectibility of lease payments is reasonably predictable and that no additional costs will be incurred. Moose Jaw has a December 31 year end.
Required: | |
a) | What type of lease is this for the lessor? Justify your answer. |
b) | Calculate the amount of each semi-annual lease payment. |
c) | Prepare a lease amortization schedule for Moose Jaw for the first 2 years of the lease. |
d) | Prepare the journal entries on Moose Jaw's books for the lease on each of the following dates: |
| July 1, 2020 |
| December 31, 2020 |
| June 30, 2021 |
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