QUESTION DATA: Black Manufacturing Co. agreed to lease machinery to White Inc. Details of the lease agreement are as follows: (1). The non-cancellable lease term is 5 years, beginning August 1, 2020, with the first annual payment of $82,820 due immediately. 2). The fair market value of the leased machinery on August 1, 2020 is $400,000. The equipment cost Black $300,000 to manufacture. (3). The implicit rate in the lease is 5%. (4). The machinery has an economic life of 6 years. (5). Both companies depreciate all capital assets using the straight-line method. (6). White Inc. has a bargain option to purchase the machinery for $30,000 at the end of the lease term. The fair market value of the machinery at that time is expected to be $60,000 (7). Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by Black Manufacturing Co. (8). Both companies have a December 31 year-end and follow ASPE. REQUIRED: Complete the specific steps below. Step 1: Lease classification criteria both for the Lessee and Lessor and for IFRS and ASPE has been provided below. Select whether the criteria test is needed for Black Manufacturing Co. (Lessor) using the drop-down box provided (Yes/No). Step 2: For all the criteria you concluded is applicable in Step 1 (test answered "YES"), complete the actual test in the blue cells provided. Make sure to show all your work in accordance with the accounting standards applied by the lessor. If the test is not required, leave the blue cell BLANK. Step 3: Select an appropriate conclusion from the drop-down box provided. Only select a conclusion for those tests performed in Step 2. Step 3: Select an appropriate conclusion from the drop-down box provided. Only select a conclusion for those tests performed in Step 2. Lease criteria test Step 1: Required test? Step 2: Applicable test completed (if test is not needed, leave BLANK) Step 3: Conclude it Step 2 blank, leave BLANK here) Low-valued asset Short-term lease Yes No Transfer of ownership Economic life test Rate = n PMT= FV = Type: Substantial recovery test PV = Economic life test Fal Pass Rate = nal PMT FVE Substantial recovery test Type=1 PV = Specialized asset Normal credit risk All costs known Step 4: Assume Blank Manufacturing Co. concludes the lease to be a capital lease Select using the drop-down box the specific type of lease. Explain why you made your selection Specific type of lease: Explanation why: Financing Operating Salespe Step 5: Complete the amortization schedule given below. Only those cells in blue require completion. Do not leave a blue cell blank. If it is zero, Insert a zero. Round all interest amounts to the nearest whole number Date Payment Interest Aug. 1/20 Aug. 1/20 Aug. 1/21 Principal Carrying Value $ 400,000 82,820 250.219 $82,820 15,859 Step 6: Prepare the journal entries required from August 1, 2020 to August 1, 2021 for Black Manufacturing Co. Round all interest entries to the nearest whole dollar using the ROUND formula. Use the description under the date to help with the ordering of the journal entries. Date Account Title Debit Credit Aug. 1/20 Lease start Aug. 1/20 P1 Dec. 31/20 V/E Aug. 1/21 P2 Aug. 1/20 P1 Dec. 31/20 VE Aug. 1/21 P2 Step 7: Prepare the journal entry for Black Manufacturing Co. on August 1, 2025 (the end of the lease), assuming White Inc. exercises the option to purchase the machinery. Any interest earned from the last payment date can be ignored. Account Title Debit Credit Date Aug. 1/25
