On January 1, 2023, Brady Inc. enters into a 5-year non-cancellable lease with Brees Ltd. for equipment that has an estimated useful life of 5 years and a fair value of $2,000,000. Bradys incremental borrowing rate is 8% and Brees implicit rate is 6%. Brady uses the straight-line depreciation method to depreciate assets. Brady will make annual lease payments on January 1 of each year (with the first payment due at the beginning of the lease) based on the fair value of the equipment. The lease agreement includes a guarantee that Brady will take over ownership of the equipment from Brees for a final payment of $100,000. In addition to the equipment, Brees convinced Brady to also lease some small office equipment. For a $300 a month lease payment, for a term of 1 year, Brady gets the equipment it needs to run a small office with 3 staff. Both companies adhere to IFRS.

Instructions

a)

Calculate the lease payment Brees Ltd. will charge Brady Inc. assuming that there is no mark up on the fair value of the equipment. Round to the nearest dollar.

b)

Calculate the present value of the minimum lease payments. Round to the nearest dollar.

c)

Present the journal entries that Brady Inc. would record during the first year of the equipment lease. Round to the nearest dollar.

d)

Prepare the journal entries that Brady Inc. would record in the first two months of the office equipment lease. Round to the nearest dollar.

e)

CRITICAL THINKING: Are these two lease agreements accounted for differently. If so, why is there a difference?