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On March 1, 2021, Shrek Inc. enters into a seven-year non-cancellable lease with Fiona Ltd. For machinery having an estimated useful life of nine years
On March 1, 2021, Shrek Inc. enters into a seven-year non-cancellable lease with Fiona Ltd. For machinery having an estimated useful life of nine years and a fair value of $ 4,300,000. Shrek's incremental borrowing rate is 8% and Fiona's implicit rate is 6%. Shrek uses the straight-line depreciation method to depreciate assets. The machinery has an economic life of 10 years and has a residual value of $100,000. Shrek will make annual lease payments on March 1 of each year. The lease is non-renewable. At the termination of the lease, the machinery will revert back to the lessor. Both companies adhere to IFRS 16. Required: a) Calculate the lease payment that the lessor must charge the lessee to ensure that their investment can be recovered by the lease payments. Check figure: present value of the investment to be recovered in lease payments is $4,233,494 b) Present the journal entries that would be required by Shrek Inc. up December 31, 2022. Assume that the lessee has a year end of Dec 31. (include any adjusting entries!) Before you begin - you will need to ensure that you know who the lessee is and who the lessor is to ensure that you properly respond to the entries required in part b
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