Question:

Kask Co. uses leases as a method of selling its small aircraft. The company has just completed production of an airplane at a cost of $6,000,000 and will lease it to Beta Corp., a small charter airline, on September 2, 2016. Sigma marks up its airplanes by 30% of cost to arrive at a selling price. Both companies have a December 31 year end.

The terms of the lease are as follows:

Lease term 20 years

Useful life 25 years

Estimated value, end of lease term (unguaranteed) $1,000,000

Purchase option, end of lease term $ 100,000

Estimated salvage value, end of useful life $ 80,000

Interest rate implicit in the lease 10%

Lessee?s incremental borrowing rate 12%

Date of first annual lease payment September 2, 2016

Instructions?for lessee (Beta Corp.):

(a) Calculate the amount of each annual lease payment that Kask Corp. would require if it wanted to earn a 10% return on the lease transaction. (b) Using Excel formulas, prepare a lease payment and interest schedule covering the 20-year life of the lease.

Prepare the entries for Beta Corp. for (i) fiscal 2016 and (ii) 2017 assuming Beta is aware of the lessor?s implicit interest rate.

Prepare the entry(ies) made by Beta at the end of the lease term assuming Beta acquires the airplane by making a payment equal to the purchase option.

Determine all amounts required to be reported by Beta on its December 31, 2017 financial statements, including any disclosures required in the notes to the financial statements for this type of lease. Set up your answer under the following headings:

Balance Sheet, including the balance sheet classification (exclude cash)

Income Statement

Cash Flow Statement, including the type of cash flow

Notes to the Financial Statements specifically required by IAS 17

Answer Part 1 again, but this time, under the assumption that Beta guaranteed a residual value of $500,000 and there was no purchase option at the end of the lease. What amount of depreciation expense would Beta recognize in 2017 on the leased asset under this assumption?

Instructions?for lessor (Kask Co.):

• Explain to the new co-op accounting student how Kask Co. will account for this lease arrangement; that is, what income statement and balance sheet accounts will be affected in 2016, and in what amounts.

Other instructions:

• Identify the differences between ASPE and IFRS in determining whether a lease is a capital/financing lease or an operating lease for the lessee. (Note: do not write a paragraph on each of ASPE and IFRS. Instead set up a table with two columns ? one for ASPE and one for IFRS ? and then only identify ways in which one differs from the other; i.e., Difference #1, Difference #2, etc.).

Question: Kask Co. uses leases as a method of selling its small aircraft. The company has just completed production of an airplane at a cost of $6,000,000 and will lease it to Beta Corp., a small charter airline, on September 2, 2016. Sigma marks up its airplanes by 30% of cost to arrive at a selling price. Both companies have a December 31 year end. The terms of the lease are as follows: Lease term Useful life Estimated value, end of lease term (unguaranteed) Purchase option, end of lease term Estimated salvage value, end of useful life Interest rate implicit in the lease Lessee's incremental borrowing rate Date of first annual lease payment 20 years 25 years $1,000,000 $ 100,000 $ 80,000 10% 12% September 2, 2016 Instructionsfor lessee (Beta Corp.): 1. (a) Calculate the amount of each annual lease payment that Kask Corp. would require if it wanted to earn a 10% return on the lease transaction. (b) Using Excel formulas, prepare a lease payment and interest schedule covering the 20-year life of the lease. 2. Prepare the entries for Beta Corp. for (i) fiscal 2016 and (ii) 2017 assuming Beta is aware of the lessor's implicit interest rate. 3. Prepare the entry(ies) made by Beta at the end of the lease term assuming Beta acquires the airplane by making a payment equal to the purchase option. 4. Determine all amounts required to be reported by Beta on its December 31, 2017 financial statements, including any disclosures required in the notes to the financial statements for this type of lease. Set up your answer under the following headings: Balance Sheet, including the balance sheet classification (exclude cash) Income Statement Cash Flow Statement, including the type of cash flow Notes to the Financial Statements specifically required by IAS 17 5. Answer Part 1 again, but this time, under the assumption that Beta guaranteed a residual value of $500,000 and there was no purchase option at the end of the lease. What amount of depreciation expense would Beta recognize in 2017 on the leased asset under this assumption? Instructionsfor lessor (Kask Co.): 6. Explain to the new co-op accounting student how Kask Co. will account for this lease arrangement; that is, what income statement and balance sheet accounts will be affected in 2016, and in what amounts. Other instructions: 7. Identify the differences between ASPE and IFRS in determining whether a lease is a capital/financing lease or an operating lease for the lessee. (Note: do not write a paragraph on each of ASPE and IFRS. Instead set up a table with two columns - one for ASPE and one for IFRS - and then only identify ways in which one differs from the other; i.e., Difference #1, Difference #2, etc.)