On January $1,2023,$ Hunter Ltd$.$ entered into an agreement to lease a truck from Situ Ltd$.$ Both Hunter and Situ use IFRS. The details of the agreement are as follows:

Carrying value of truck for Situ

$$20,691$

Fair value of truck

$$20,691$

Economic life of truck

$5$ years

Lease term

$3$ years

Rental payments $($at beginning of each month$)$

$$620$

Executory costs included in rental payments each month for insurance

$$20$

Incremental borrowing rate for Hunter

$12\%$

Hunter expects to pay Situ $$3,500$ under a residual value guarantee for the truck.

$$

Additional information:

There are no abnormal risks associated with the collection of lease payments from Hunter.

There are no additional unreimbursable costs to be incurred by Situ in connection with the leased truck.

At the end of the lease term, Situ sold the truck to a third party for $$3,200,$ which was the truck$$s fair value at December $31,2025.$ Hunter paid Situ the difference between the residual value guarantee of $$3,500$ and the proceeds obtained on the resale.

Hunter knows the interest rate that is implicit in the lease.

Hunter knows the amount of executory costs included in the minimum lease payments.

Hunter uses straight$-$line depreciation for its trucks with the residual value guarantee of $$3,500$ for the leased truck.

Instructions

$1.$Discuss the nature of this lease for both Hunter $($the lessee$)$ and Situ $($the lessor$).$

$2.$Assume that the effective interest rate of $12\%$ had not been provided in the data. Prove the effective interest rate of $12\%$ using $(1)$ a financial calculator or $(2)$ Excel functions.

$3.$Prepare a lease amortization schedule for the full term of the lease using Excel. Round all amounts to the nearest dollar.

$4.$Identify all accounts that will be reported by Hunter on its comparative statement of financial position at December $31,2024$ and $2023,$ and comparative income statement for the fiscal years ended December $31,2024$ and $2023.$ Include all the necessary note disclosures on the transactions related to this lease for Hunter and be specific about the classifications in each statement.

$5.$Prepare the journal entry for Hunter$$s payment on December $31,2025,$ to Situ to settle the guaranteed residual value deficiency. Assume that no accruals for interest have been recorded as yet during $2025,$ but that the $2025$ depreciation expense for the truck has been recorded.

$6.$ Prepare Hunter$$s partial comparative statement of cash flows for the years ended December $31,2024$ and $2023,$ for all transactions related to the above information. Be specific about the classifications in the financial statement. Hunter has opted to show interest paid as operating activities.

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