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On April 1, 2021, AW Leasing Co. (AW) leased equipment to EZ Manufacturing (EZ). Both private companies advere to Accounting Standards for Private Enterprises, have

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On April 1, 2021, AW Leasing Co. (AW) leased equipment to EZ Manufacturing (EZ). Both private companies advere to Accounting Standards for Private Enterprises, have calendar year-ends and depreciate all equipment on a straight-line basis Details of the lease agreement follow The lease has a non-cancellable term of 6 years, with no renewal option Equal annual rental payments of $84,500 are to be paid every April 1, starting April 1, 2021. In March of 2021, AW purchased the equipment at a cost of $418,225 and recorded the eychase to the account Equipment acquired for Lessee". At April 1, 2021, the equipment has a fair market value of $418,225, The annual lease payment includes $2,500 for an annual insurance policy (term April 1 - March 31). AW collects insurance on behalf of all Lessee customers and charges such collections against Insurance expense". When AW receives the actual insurance invoice, It records the actual insurance costs to "Insurance expense" The equipment has an expected useful life of 8 years and is expected to have a residual value of $14,000 at the end of the lease term. The residual value is not guaranteed by EZ Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by AW Leasing Co. 12 EZ has the option to purchase the equipment at the end of the lease for $20,000, which is not considered a bargain The lease has an implicit rate of 8% (which is known by both parties) and the incremental borrowing rate is 7% . 3 1 REQUIRED: Complete the specific steps below. Step 1: Lease classification criteria both for the Lessee and Lessor and for IFRS and ASPE has been provided below. Select whether the criteria test is needed for AW Leasing Co, using the drop down box provided (Yes/No). HINT: identin which test is needed given the standard followed by the LESSOR. Step 2: For the criteria tests with blue cells ONLY, select from the drop-down box an appropriate response for AW Leasing. Read through all Dossible responses Step 1: Required test? Lease criteria test Step 2: Select Appropriate response Lease criteria test Required test2 Step 2: Select Appropriate response 5 Low-valued asset Short-term lease Transfer of ownership Economic life test Substantial recovery test Specialized asset Normal credit risk All costs known Step 3: Assume AW Leasing Co. concludes the lease to be a capital lease Select using the drop-down box the specific type of lease. Explain why you made your selection, Specific type of lease: Step 3: Assume AW Leasing Co. concludes the lease to be a capital lease Select using the drop-down box the specific type of lease. Explain why you made your selection Specific type of lease: Explanation why

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