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On January 1, 2019, Simpson Ltd. (SIMP), leased a specialized piece of diagnostic equipment to the Picasso Plumbing Partners Inc (PPP). Details are as follows:
On January 1, 2019, Simpson Ltd. (SIMP), leased a specialized piece of diagnostic equipment to the Picasso Plumbing Partners Inc (PPP). Details are as follows: GWB's cost to manufacture $ 80,000 Normal sales price $100,000 Lease term 8 years Economic Life 12 years Residual value at the end of the lease term $10,000 Residual value at end of useful life $ 8,000 Lease payment (1st payment payable January 1, 2019) $ ? Purchase option (exercisable at end of year 8) $2,000 Incremental borrowing rate of WMD 11% Rate implicit in the lease not known to the lessee) 10% Assume that SIMP has reasonable assurance that PPP will make the remaining lease payments. All costs of operating the leased equipment are borne by PPP. Payments are made on January 1st. Both companies have a December 31 year-end and follow IFRS accounting standards for leases. 3 a) Determine the yearly lease payment that SIMP will charge PPP. [3 marks] 3 b) Classify this lease, showing all indicators, for the Lessor. [2 marks] 3c) Prepare the journal entries for the Lessor for January 1, 2019, December 31, 2019 and January 1, 2020. [8 marks] 3 d) Prepare the journal entries at the end of the lease for the Lessor assuming that the market value of the equipment is $500 so PPP decides not to complete the purchase and returns the equipment to SIMP. [3 marks]
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