Question 4 Leases Classification, amortization, and journal entries

On January 1, 2020, Apple Corp. which uses IFRS, signs a 10-year, non-cancellable lease agreement to lease a specialty X ray machine from Linda Inc.

The following information concerns the lease agreement:

The agreement requires equal rental payments of $73,580 beginning on January 1, 2020.

The x ray machine fair value on January 1, 2020, is $450,000.

The x ray machine has an estimated economic life of 12 years, with an unguaranteed residual value of $12,000.

Apple Corp. depreciates similar equipment using the straight-line method.

The lease is non-renewable. At the termination of the lease, the x ray reverts to the lessor.

Apples incremental borrowing rate is 12% per year. The lessors implicit rate is not known by Apple Corp.

The yearly rental payment includes $2,470.29 of executory costs related to insurance on the x ray machine.

Required:

a. (5 marks) Calculate the amount of the right-of-use asset and lease liability and prepare the initial journal entry to reflect the signing of the lease agreement.

b. (10 marks) Prepare an amortization schedule for the term of the lease to be used by Apple. Round to the nearest cent.

Date	Annual Payment (excluding Executory Costs)	Interest on unpaid liability	Reduction on Lease liability	Balance of lease

c. (5 marks) Prepare the journal entries on Apples Corp.s books to record the payments and expenses related to this lease for the years 2020 and 2021. Apple does not use reversing entries.