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On January 1, 2023, Vaughn Ltd. entered into an agreement to lease a truck from Sandhill Ltd. Both Vaughn and Sandhill use IFRS. The
On January 1, 2023, Vaughn Ltd. entered into an agreement to lease a truck from Sandhill Ltd. Both Vaughn and Sandhill use IFRS. The details of the agreement are as follows: Carrying value of truck for Sandhill Fair value of truck Economic life of truck Lease term Rental payments (at beginning of each month) Executory costs included in rental payments each month for insurance Incremental borrowing rate for Vaughn Vaughn expects to pay Sandhill $3,560 under a residual value guarantee for the truck. $20,885 $20,885 5 years 3 years $630 $25 12% Additional information: 1. There are no abnormal risks associated with the collection of lease payments from Vaughn. 2. There are no additional unreimbursable costs to be incurred by Sandhill in connection with the leased truck. 3. At the end of the lease term, Sandhill sold the truck to a third party for $3,265, which was the truck's fair value at December 31, 2025. Vaughn paid Sandhill the difference between the residual value guarantee of $3,560 and the proceeds obtained on the resale. 4. Vaughn knows the interest rate that is implicit in the lease. 5. Vaughn knows the amount of executory costs included in the minimum lease payments. 6. Vaughn uses straight-line depreciation for its trucks with the residual value guarantee of $3,560 for the leased truck. Prepare the journal entries that Sandhill would make on January 1, 2023, and the adjusting journal entries at December 31, 2023, to record the annual interest income from the lease arrangement, assuming that Sandhill has a December 31 fiscal year end. (List all debit entries before credit entries. 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 O for the amounts. Round answers to O decimal places, e.g. 5,275.) Date Account Titles and Explanation Jan. 1, 2023 Lease Receivable Dec. 31, 2023 Insurance Expense Debit Credit 25
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