SECTION I

No International Industries (NII) , Inc., leased a drone to Frequent Flying Folks, Ltd., [FFF] on January 1, 2019. Both companies report under ASPE. The following information relates to the leased asset and the lease agreement:

Fair value of leased drone $260,000

Useful life 15 years

Lease term 10 years

Payment frequency Annual

Payment timing annually January 1

Annual payments at the beginning of each year $33,000

First payment made January 1, 2019

Estimated residual value at end of the lease, unguaranteed $45,000

Ownership of drone reverts to lessor at end of lease term

Interest rate implicit in the lease [unknown to the lessee] 7%

Lessee incremental borrowing rate 8%

Year end for both companies December 31

Amortization method - FFF Straight line

Accounting standards used - FFF ASPE

- NII IFRS

Part 1] How should FFF classify the lease?

Select one:

a. An operating lease because the ownership rights are not acquired by the lessee.

b. A capital lease because the lease term is less than the useful life of the asset.

c. A capital lease because the contract conveys the right to control the use of an identified asset for a defined period of time in exchange for consideration.

d. An operating lease because FFF is not applying IFRS 16.

e. A capital lease because the contract terms meet one of the criteria specified by ASPE.

Part 2] Assume that FFF decides to classify the lease contract as a capital lease. This was done because

Select one:

a. the contract transferred the ownership rights to the lessee and thus met the ownership criterion.

b. the contract met the criterion for the economic life test that most of the risks and rewards of ownership will accrue to the lessee, FFF.

c. a minimum lease payment of $33,000 exceeds 10% of the fair market value of the leased asset.

d. the contract met the criterion for the recovery of investment test as the present value of the total minimum lease payments is nearly 92% of the fair value of the leased asset.

e. it does not know the implicit rate of the lease contract as used by the lessor, NII.

Part 3] The journal entry prepared by FFF to record the lease contract on January 1, 2019 would be

Select one:

a. Assets Under Capital Lease, $330,000; CR Obligation Under Capital Lease, $330,000 .

b. Assets Under Capital Lease, $239,147; CR Obligation Under Capital Lease, $239,147 .

c. Assets Under Capital Lease, $239,147; CR Cash, $239,147 .

d. Assets Under Capital Lease, $260,000; CR Obligation Under Capital Lease, $260,000.

e. Assets Under Capital Lease, $259,991; CR Obligation Under Capital Lease, $259,991.

Part 4] The journal entry prepared by FFF to record any other transaction related to the lease contract on January 1, 2019.

Select one:

a. DR Cash, $33,000; CR Obligation Under Capital Lease, $33,000 .

b. DR Obligation Under Capital Lease, $33,000; CR Cash, $33,000 .

c. DR Executory Costs - Capital Lease, $33,000; CR Cash, $33,000 .

d. DR Interest Expensese, $33,000; CR Cash, $33,000 .

e. No journal entry required as there was no other transaction on January 1, 2019.