The Director of Finance of the Government agency you work for comes into your office. He knows that you are an expert at accounting for leases. He mentions that he just forwarded you a few emails that contain some information about a new office lease that the agency is about to enter into. He would like you to let him know before the end of the day of the accounting implications that entering into that lease would have on the books of the agency. The agency uses IFRS, will have exclusive use of the office premises and can direct its use throughout the 4-year lease term. Fees of $5,000 were paid to accountants and lawyers to help drafting the agreement.

Here are the relevant details from the emails:

• Annual payments of $3,200,000 starting on January 1, 2021
• There is a clause in the contract that guarantees a residual value of $400,000 to the lessor at the end of the lease. The lessee knows that the lessor has set the equal annual rentals to ensure an 4% rate of return.
• The agency has an option to purchase the office space for $750,000 after 4 years
• The economic and useful lives of the asset at the time of signing this lease are both 10 years
• The office is located at 111, Bob Street, Ottawa, Ontario.

In reviewing internal documents, you note that:

• The agency has recently borrowed money from a bank at a 6% rate. The loan had the same characteristics as the office lease.
• Year-End of the agency is December 31
• For simplicity, the agency uses the straight-line amortization for all the assets on its books

Required

1. What classification would the agency give to the lease? Analyze each criteria

1. If necessary, calculate the value of the right-of-use asset and the lease obligation
2. If necessary, prepare the full lease amortization schedule

2. Prepare all necessary journal entries related to the lease for the 2021 and 2022 year

3. Prepare a partial income statement, a partial balance sheet and a partial statement of cash flows for 2021 showing the accounts and amounts related to the lease contract.

4. Lets assume that at the end of the lease term, the lessor sells the office to a third party and receives $300,000 for it. This information was not known before December 31, 2024:

1. What would be the balances (debit and/or credit balances) left on the balance sheet of the agency relating to the office lease on December 31, 2024?
2. What would be the journal entry you would book to close the office building from the books of the agency?

Clearly state any necessary assumption and provide all your calculations.