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Question 4: Leases (17 Marks) On January 1, 2020, Lannister Inc. enters into a seven-year non-cancellable lease with Fiona Ltd. for machinery having an estimated
Question 4: Leases (17 Marks) On January 1, 2020, Lannister 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 $ 4,500,000. Lannisters incremental borrowing rate is 8% and Fionas implicit rate is 6%. Lannister uses the straight-line depreciation method to depreciate assets. Lannister will make annual lease payments of $715,441 on January 1 of each year. The lease includes a guaranteed residual value of the machinery of $100,000. Both companies adhere to IFRS 16. Instructions a) Create a lease amortization schedule for Lannister. (4 marks) b) What kind of lease is this to Lannister Inc.? Why? (2 marks) c) Present the journal entries that Lannister Inc. would record during 2020 and 2021. (8 Marks) d) If Lannister followed ASPE instead of IFRS, would this be a capital lease or operating lease? Why? (3 marks)
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