# Question: Jennings Inc which uses IFRS manufactures an X ray machine with

Jennings Inc., which uses IFRS, manufactures an X-ray machine with an estimated life of 12 years and leases it to SNC Medical Centre for a period of 10 years. The machine’s normal selling price is \$343,734, and the lessee guarantees a residual value at the end of the lease term of \$15,000. The medical centre will pay rent of \$50,000 at the beginning of each year and all maintenance, insurance, and taxes. Jennings incurred costs of \$210,000 in manufacturing the machine and \$14,000 in negotiating and closing the lease. Jennings has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that its implicit interest rate is 10%.
Instructions
Answer the following questions, rounding all numbers to the nearest dollar.
(a) Discuss the nature of this lease in relation to the lessor and calculate the amount of each of the following items:
1. Gross investment
2. Sales price
3. Unearned interest income
4. Cost of sales
(b) Prepare a 10-year lease amortization schedule for the lease obligation.
(c) Prepare all of the lessor’s journal entries for the first year.
(d) Identify the amounts to be reported on Jennings’s balance sheet, income statement, and statement of cash flows one
year after signing the lease, and prepare any required note disclosures.
(e) Assume that SNC Medical Centre’s incremental borrowing rate is 12% and that the centre knows that 10% is the rate implicit in the lease. Determine the depreciation expense that SNC will recognize in the first full year that it leases the machine.
(f) Assuming instead that the residual value is not guaranteed, what changes, if any, are necessary in parts (a) to (d) for the lessor and in part (e) for the lessee?
(g) Discuss how Jennings would have determined the classification of the lease if the company were using private enterprise GAAP for its financial reporting.

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