Silver Company Ltd. leased equipment to Grey Company on January 1, 2015. The equipment has an economic life of 8 years. The term of the non-cancellable lease is 7 years. Silver Company determined that the implicit interest rate was 10%.

Grey Company will make annual payments of $55,000 at the beginning of each year. The equipment had a cost basis of $250,000 to Silver Company. The initial direct sots related to the lease amounted to $6,572.00 The selling price of the equipment is $302,750 and its unguaranteed residual value at the end of the lease term is estimated to be $16,000.

Instructions

a. Discuss the nature of the lease to Silver Company Ltd. (3 marks)

b. Compute each of the following in relation to Silver Company Ltd:

i) Lease Receivable (4 marks)

(ii) Sales price of the asset (2 marks)

(iii) Cost of goods sold

(iv) Gross Profit

c. Prepare the 7-year lease amortization schedule for Silver Company Ltd.

d. Prepare the journal entries for Silver Company Ltd. for the year 2015.

e. Discuss the nature of the lease to Grey Company.

f. Prepare the lease amortization schedule for Grey Company for the first two years.

g. Prepare the journal entries for Grey Company for the year 2015.