Victoria Leasing Corporation, which uses ASPE, leases a new machine that has a cost and fair value of $95,000 to Black Corporation on a three-year, non-cancellable contract. Black Corporation agrees to assume all risks of normal ownership, including such costs as insurance, taxes, and maintenance.
The machine has a three-year useful life and no residual value. The lease was signed on January 1, 2014, and Victoria Leasing Corporation expects to earn a 9% return on its investment. The annual rentals are payable on each December 31, beginning December 31, 2014. Black Corporation has an excellent credit rating and so Victoria Leasing is reasonably assured of the collections under the lease.
Instructions
(a) Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply.
(b) Provide a calculation proving the relationship between the annual lease payment and the present value of minimum lease payments.
(c) Use a computer spreadsheet to prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.
(d) Discuss the differences, if any, in the classification of the lease to Victoria Leasing Corporation (the lessor) or to Black Corporation (the lessee) if both were using IFRS in their financial reporting.