Question

On May 1, 2011, a machine was purchased for $1,750,000 by Pomeroy Corp. The machine is expected to have an eight-year life with no salvage value and is to be depreciated on a straight-line basis. The machine was leased to St. Isidor Inc. on May 1, 2011, at an annual rental of $480,000. Other relevant information is as follows:
1. The lease term is three years.
2. Pomeroy Corp. incurred maintenance and other executory costs of $61,000 for the fiscal year ending December 31, 2011, related to this lease.
3. The machine could have been sold by Pomeroy Corp. for $1,850,000 instead of leasing it.
4. St. Isidor is required to pay a rent security deposit of $65,000 and to prepay the last month’s rent of $40,000 on signing the lease.
5. Both Pomeroy and St. Isidor use IFRS.
Instructions
(a) How much should Pomeroy Corp. report as income before income tax on this lease for 2011?
(b) What amount should St. Isidor Inc. report for rent expense for 2011 on this lease?
(c) What financial statement disclosures relative to this lease are required for each company’s December 31, 2011 year end assuming private enterprise GAAP had been used for each company?
(d) What additional disclosures, if any, apply if both companies use IFRS?


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  • CreatedAugust 23, 2015
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