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On January 1, 2020, Dufferin Corp. enters into a 10-year non-cancellable lease with Pine Ltd. to lease equipment with an estimated useful life of 11
On January 1, 2020, Dufferin Corp. enters into a 10-year non-cancellable lease with Pine Ltd. to lease equipment with an estimated useful life of 11 years and a fair value of $6,000,000. The borrowing rate on the lease is 8%. Dufferin uses the straight-line method to depreciate assets. The lease contains the following provisions:
- Semi-annual lease payments of $438,000 (the payments include $38,000 for property taxes), payable on January 1 and July 1 of each year.
- A guarantee by Dufferin Corp. that Pine Ltd. will realize $200,000 from selling the asset at the expiration of the lease.
Both companies adhere to IFRS.
Instructions
- Calculate the present value of the minimum lease payments over the life of the lease. Round to the nearest dollar.
- What kind of lease is this to Dufferin Corp.? Why?
- Provide a lease amortization schedule for the full lease. The schedule should be made with Excel and copied a Word document. The lease amortization schedule provides you an opportunity to check that your present value calculation is correct.
- Prepare the journal entries for Dufferin for the first year of the lease. Do not forget about Taxes or Deprecation.
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