Question 5 Leases (11 marks)

On January 1, 2021, DBT Inc. entered into a five-year finance lease of machinery. The machinery has a useful life of six years. The annual lease payments are $7,000 per year, with the first payment made on January 1, 2021.

To obtain the lease DBT incurs initial direct costs of $2,500 in relation to the arrangement of the lease but the lessor agrees to reimburse DBT $1,000 towards the costs of the lease.

The rate implicit in the lease is 5%. The present value of the minimum lease payments is $31,822.

Required:

1) Record the initial lease entry for DBT including the initial direct costs and incentives (3 marks).

2) Prepare the full lease schedule for DBT (3 marks).

3) Record the remaining 2021 and 2022 journal entries for the lease (5 marks).

Assume DBT follows IFRS.