Question
On January 1, 2020, Daso Ltd. entered into an agreement to lease a truck from Henry Ltd. Both Daso and Henry use IFRS 16. The
On January 1, 2020, Daso Ltd. entered into an agreement to lease a truck from Henry Ltd. Both Daso and Henry use IFRS 16. The details of the agreement are as follows:
Carrying value of truck for Henry Ltd. | $22,839 | |
Fair value of truck | $22,839 | |
Economic life of truck | 5 years | |
Lease term | 3 years | |
Rental payments (at beginning of each month) | $690 | |
Executory costs included in rental payments each month for insurance | $18 | |
Incremental borrowing rate for Bramble Ltd. | 12% | |
Daso Ltd. expects to pay Henry Ltd. $3,440 under a residual value guarantee for the truck. |
Additional information:
1. | There are no abnormal risks associated with the collection of lease payments from Daso. | |
2. | There are no additional unreimbursable costs to be incurred by Henry in connection with the leased truck. | |
3. | At the end of the lease term, Henry sold the truck to a third party for $3,085, which was the trucks fair value at December 31, 2022. Daso paid Henry the difference between the guaranteed residual value of $3,440 and the proceeds obtained on the resale. | |
4. | Daso knows the interest rate that is implicit in the lease. | |
5. | Daso knows the amount of executory costs included in the minimum lease payments. | |
6. | Daso uses straight-line depreciation for its trucks with the residual value guarantee of $3,440 for the leased truck. |
Prepare the journal entries that Henty would make on January 1, 2020, and the adjusting journal entries at December 31, 2020, to record the annual interest income from the lease arrangement, assuming that Daso has a December 31 fiscal year end. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)
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