Question

Dubois Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2011. Annual rental payments of $41,000 are to be made at the beginning of each lease year (January 31). The taxes, insurance, and maintenance costs are the lessee’s obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Dubois’ incremental borrowing rate is 10%. Dubois is unaware of the rate being used by the lessor. At the end of the lease, Dubois has the option to buy the equipment for $4,000, which is considerably below its estimated fair value at that time. The equipment has an estimated useful life of seven years with no residual value. Dubois uses straight-line depreciation on similar equipment that it owns, and follows IFRS.
Instructions
Answer the following questions, rounding all numbers to the nearest dollar.
(a) Prepare the journal entry or entries, with explanations, that should be recorded on January 31, 2011, by Dubois.
(b) Prepare any necessary adjusting journal entries at December 31, 2011, and the journal entry or entries, with explanations, that should be recorded on January 31, 2012, by Dubois. (Prepare the lease amortization schedule for the lease obligation using a computer spreadsheet for the minimum lease payments.) Dubois does not use reversing entries.
(c) Prepare any necessary adjusting journal entries at December 31, 2012, and the journal entry or entries, with explanations, that should be recorded on January 31, 2013, by Dubois.
(d) What amounts would appear on Dubois’ December 31, 2012 balance sheet relative to the lease arrangement?
(e) What amounts would appear on Dubois’ statement of cash flows for 2011 relative to the lease arrangement? Where would the amounts be reported?
(f) Assume that the leased equipment had a fair value of $200,000 at the inception of the lease, and that no bargain purchase option is available at the end of the lease. Determine what amounts would appear on Dubois’ December 31, 2012 balance sheet and what amounts would appear on the 2012 statement of cash flows relative to the leasing arrangements.


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  • CreatedAugust 23, 2015
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