On January 1, 2011, Vick Leasing Inc., a lessor that uses IFRS, signed an agreement with Rock Corporation, a lessee, for the use of a compression system. The system cost $415,000 and was purchased from Manufacturing Solutions Ltd. specifically for Rock Corporation. Annual payments are made each January 1 by Rock. In addition to making the lease payment, Rock also reimburses Vick $4,000 each January 1 for a portion of the maintenance expenditures, which cost Vick Leasing a total of $6,000 per year. At the end of the five-year agreement, the compression equipment will revert to Vick and is expected to have a residual value of $25,000, which is not guaranteed. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs that have not yet been incurred by Vick Leasing Inc.
Instructions
(a) Assume that Vick Leasing Inc. has a required rate of return of 8%. Calculate the amount of the lease payments that would be needed to generate this return on the agreement if payments were made each:
1. January 1
2. December 31
(b) Use a computer spreadsheet to prepare an amortization table that shows how the lessor's net investment in the lease receivable will be reduced over the lease term if payments are made each:
1. January 1
2. December 31
(c) Assume that the payments are due each January 1. Prepare all journal entries and adjusting journal entries for 2011 and 2012 for the lessor, assuming that Vick has a calendar year end. Include the payment for the purchase of the equipment for leasing in your entries and the annual payment for maintenance.
(d) Provide the note disclosure concerning the lease that would be required for Vick Leasing Inc. at December 31, 2012.
Assume that payments are due each January 1.