VidEqp Company, Inc., [VEI] manufactures equipment for use by studios producing movies. It leased a studio crane to Glamour Studios, Inc., [GSI] on January 1, 2016 on a 10-year lease. VEI reports under ASPE while GSI reports under IFRS. Both companies use the straight line method of amortization and December 31 as their year end. It was agreed that annual lease instalments of $99,000 would be charged at the beginning of the year.

The crane had a fair market value of $780,000 with a 15-year life. It was agreed that the crane would be returned unconditionally at the end of the lease term. The lessor estimated its value at the end of the lease to be $135,000 and the lessee offered no guarantee for its market value on the return date. The interest rate implicit in the lease was 7%. However since the lessor refused to disclose this information, the lessee used its incremental rate of 8% which was being charged by its bankers.

USE THE INFORMATION GIVEN ABOVE TO ANSWER QUESTIONS 23 - 29.

REQUIRED: Select the alphabet of the one best answer to each of the questions listed below and input it in the computer. Working with the assumptions that the residual value was not guaranteed by the lessee, now assume that on January 1, 2026, the date on which the lease ended, the fair market value of the equipment was determined to be $137,800

[26] The required journal entry/entries prepared by GSI, for recording the return of the leased crane would be

Select one:

a.

DR Obligation Under Capital Lease, $135,000; CR Assets Under Capital Lease, $135,000 plus DR Cash $3,800; CR Gain Under Capital Lease, $3,800

b.

DR Assets Under Capital Lease, $135,000;

CR Obligation Under Capital Lease, $135,000 PLUS

DR Cash, $3,800; CR Contributed Surplus - Leases, $3,800

c.

DR Obligation Under Capital Lease, $3,800; CR Assets Under Capital Lease, $3,800

d.

DR Accumulated Amortization - Leased Assets, $717,442;

CR Assets Under Capital Lease, $717,442 PLUS a description noting the return of the asset to the lessee

e.

No journal entry required