The following facts pertain to a non-cancellable lease agreement between Woodhouse Leasing Corporation and McKee Electronics Ltd., a lessee, for a computer system:
Inception date..............................................................................October 1, 2014
Lease term..............................................................................................6 years
Economic life of leased equipment..................................................................6 years
Fair value of asset at October 1, 2014............................................................$150,690
Residual value at end of lease term.....................................................................-0-
Lessor's implicit rate....................................................................................8.5%
Lessee's incremental borrowing rate..................................................................8.5%
Annual lease payment due at the beginning of each year, beginning October 1, 2014 $.....30,500
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. McKee Electronics Ltd., the lessee, assumes responsibility for all executor costs, which amount to $2,500 per year and are to be paid each October 1, beginning October 1, 2014. (This $2,500 is not included in the rental payment of $30,500.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment. The following amortization schedule for the lease obligation has been prepared correctly for use by both the lessor and the lessee in accounting for this lease using ASPE. The lease is accounted for properly as a capital lease by the lessee and as a direct financing lease by the lessor.

Instructions
Answer the following questions, rounding all numbers to the nearest dollar.
(a) Assuming that McKee Electronics' accounting period ends on September 30, answer the following questions with respect to this lease agreement.
1. What items and amounts will appear on the lessee's income statement for the year ending September 30, 2015?
2. What items and amounts will appear on the lessee's balance sheet at September 30, 2015?
3. What items and amounts will appear on the lessee's income statement for the year ending September 30, 2016?
4. What items and amounts will appear on the lessee's balance sheet at September 30, 2016?
(b) Assuming that McKee Electronics' accounting period ends on December 31, answer the same questions as in part (a) above for the years ending December 31, 2014, and 2015.
(c) Discuss the differences, if any, in the classification of the lease to McKee Electronics Ltd. if the company were using IFRS in its financial reporting.

Transcribed Image Text:

Annual Lease Payment/ Receipt Interest (8.5%) on Unpaid Obligation/ Net Investment 6 Reduction of Lease Obligation/ Net Investment Balance of Lease Obligation/ 0 Date Net Investment 10/01/14 10/01/14 10/01/15 10/01/16 10/01/17 10/01/18 10/01/19 30,500 30,500 30,500 30,500 30,500 30,500 $183,000 $10,216 8,492 6,621 4,592 2,389 $32,310 $30,500 20,284 22,008 23,879 25,908 28,111 $150,690 $150,690 120,190 99,906 77,898 54,019 28,111