On January 1, 2018 Tuk Ltd., which uses IFRS 16, entered into an eight-year lease agreement for
Question:
On January 1, 2018 Tuk Ltd., which uses IFRS 16, entered into an eight-year lease agreement for drilling
equipment. Annual lease payments are $28,500 at the beginning of each lease year, which ends December 31. Tuk
made the first payment on January 1, 2018. At the end of the lease the equipment will revert to the lessor. The
drilling equipment is expected to only last eight years, and has no residual value. At the time of the lease
agreement, drilling equipment could be purchased for $167,250 (cash). Equivalent financing for the machine could
be obtained from Tuk's bank at 10 %. Tuk's fiscal year coincides with the calendar year. Tuk uses straight-line
depreciation for its drilling equipment. [Note: round all calculations to the nearest $1]
Calculate the present value of the minimum lease payments. [1 mark]
ii. What type of lease is it? Explain your answer. [1 marks]
iv. Prepare the journal entries for Tuk's books for: [6 marks]
a. Inception of lease
b. Payments and expenses (interest and depreciation), and any adjusting entries for 2018 and 2019