Question 8.1 (Total: 14 marks)

Spider co-leases a fleet of vehicles to Web Co. for 5 years. The annual lease payment, due at the beginning of the year is $75,000 and the rate implicit in the lease is 8%. Web Co. records leases under IFRS 16.

Required

What is the initial journal entry to set up the lease on Web Co.'s books?

Question 8.2 (Total: 16 marks)

On January 1, 2020, Hot Fuss Corp. purchased a building for $900,000, with the intention of leasing it. The building is expected to have a 20 year life, no residual value, and will be depreciated on a straight-line basis. On April 1, 2020, under a cancellable lease, Hot Fuss leased the building to Sam's Town Company for $300,000 a year ($25,000 a month) for a four-year period ending March 31, 2024. Sam's Town paid $300,000 to Hot Fuss on April 1, 2020. During calendar 2020, Hot Fuss incurred $30,000 in maintenance and other executory costs under the provisions of the lease. This lease is properly classified as an operating lease by both parties.

Required

1. How much income before income taxes will Hot Fuss Corp. report from this lease for calendar 2020?
2. How much rent expense will Sam's Town report in connection with this lease for calendar 2020?

Question 8.3 (Total: 24 marks)

Apple Tree Co. is a farming equipment dealer that reports using IFRS. It plans to lease a piece of farming equipment to Seed Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows:

• It will be a 5-year lease and will have annual rental payments due at the beginning of the year.
• The rate of return Apple Tree Co. wants to earn on the equipment is 7%.
• The estimated residual value (guaranteed) is $10,000 (the present value of which is $7,130).
• The annual lease payments are $55,359 (the present value of which is $242,870); and
• The leased equipment has a $200,000 cost to the dealer, Apple Tree Co.

Required

Calculate the following for Apple Tree Co:

1. Gross investment
2. Unearned interest income
3. Sales revenue
4. Cost of goods sold
5. Gross profit

Question 8.4 (Total: 46 marks)

On January 1, 2020, Thor Corp. sells land to Loki Inc. for $2,000,000, and immediately leases the land back. Both companies follow ASPE. The following information relates to this transaction:

• The term of the non-cancellable lease is 20 years and the title transfers to Thor at the end of the lease term.
• The land has a cost basis of $1,600,000 to Thor.
• The lease agreement calls for equal rental payments of $203,704 at the end of each year.
• The land has a fair value of $2,000,000 on January 1, 2020.
• The incremental borrowing rate of Thor Corp. is 10%. Thor is aware that Loki set the annual rentals to ensure a rate of return of 8%.
• Thor pays all executory costs, which total $170,000 in 2020.
• Collectability of the rentals is reasonably assured, and any un-reimbursable costs under the lease that are likely to be incurred can be reasonably estimated by the lessor.

Required

1. Prepare all the 2020 journal entries on the books of Thor Corp. to reflect the above sale and lease transactions.
2. Prepare all the 2020 journal entries on the books of Loki Inc. to reflect the above purchase and lease transactions.