On April 1, 2020, Coconut Inc. leased a new piece of equipment to Water Ltd. under a 10-year non-cancellable lease agreement. Both Coconut Inc. and Water Ltd. use IFRS, have calendar year-ends and use the straight-line depreciation method to depreciate assets. The following information concerns the lease agreement: The equipment has an estimated economic life of 12 years and a residual value of $35,000 at the end of the lease term. The residual value is guaranteed by the lessee. At the end of the lease term, the lessor will keep the equipment. Water Ltd. Correctly concluded this lease to be a right-of-use lease. The present value of lease payments was correctly calculated to be $575,000. An amortization schedule for the first two payments was correctly prepared as follows: 3 Date Lease payment 9 0 61 52 53 4/1/2020 4/1/2020 4/1/2021 Principal Interest Balance reduction $575,000 $ 71,197 503,803 30,228 40,969 462,834 $ 71,197 71,197 54 (S). Which journal entry is made on April 1, 2020 (lease inception) before the first payment? (5). Which journal entry is made on April 1, 2020 (lease inception) before the first payment? Account Title Debit Credit Leased equipment 575,000 A. Lease liability 575,000 503,803 B. Right-of-Use Asset Lease liability 503,803 575,000 C. Right-of-Use Asset Lease liability 575,000 746,970 D. Lease payments receivable Unearned interest income Equipment acquired for Lessee 171,970 575,000 3 #5 Answer: (6). Over what term will Water Ltd. depreciate the equipment? 1 A. 12 years 2 B. 10 years 73 C. No years as this is an operating lease. 74 D. No years as this is a right-of-use lease. A G Credit 7). Which journal entry is made on December 31, 2020 (year-end)? Account Title Debit Interest expense 22,671 A. Interest payable 22,671 Interest expense B. Lease liability 30,228 30,228 22,671 c. Interest expense Lease liability 22,671 30,228 Unearned interest income D. Interest income 30,228 #7 Ans (8). What is the amount of current lease liability recognized by Water Ltd. on its Statement of Financial Position as at December 31, 2020? A. $40,969 B. $71,197 C. $63,640 6 D. $0 as Water Ltd. Would recognize a current asset. 5 (9). What is the amount of the non-current lease liability recognized by Water Ltd. on its Statement of Financial Position as at December 31, 20207 A. $503,803 B. $575,000 C. $462,834 D. $71,197 #9 Answer: 5 = (10). The entry made on April 1, 2021 includes which of the following: 7 A. A debit to lease liability for $30,228. B. A debit to lease liability for $40,969. A debit to unearned interest income for $30,228. D. Adebit to cash for $71,197 8 9 0 10 Answer 2 4