Pigeon Ltd, a private corporation adhering to IFRS with a December 31 year-end, enters into a non-cancellable lease agreement on May 1, 2020, to lease equipment. The following data are relevant to the lease agreement:
The term of the lease is 6 years, with a purchase option at the end of the lease of 4,000. Payments of $17,400 are due annually, with the first payment due May 1, 2020. The purchase option is significantly less than market value and Pigeon expects to exercise the option.
The equipment has an economic life of 8 years with no residual value.
Pigeon depreciates similar equipment it owns on a straight-line basis.
Pigeon is aware that the lessor used an implicit rate of 8% in calculating the lease payments
Instructions
a) What type of lease this is for Pigeon? What is your rationale?
b) Prepare all journal entries on Pigeons books that relate to the lease agreement for the following dates:
1) May 1, 2020
2) December 31, 2020
3) May 1, 2021
c) What amounts /balances will be included in Pigeon's December 31, 2020 Statement of Financial Position and Income Statement related to this lease? Include classification, account name and amount. Cash can be ignored