On July 1, 2019, Cancer Ltd. signed an 10 year, non-cancellable lease agreement to lease a highly specialized MRI equipment from Aquarius Ltd. The agreement is non-renewable and requires the first payment of $70,38- every July 1, starting in 2020. The yearly rental payment includes $4500 of executory costs related to a maintenance contract on the equipment and at the end of the lease term, the machine reverts to the lessor. The machine has an estimated useful life of 12 years with an unguaranteed residual value of $33,000. Cancer Ltd. Uses the straight-line method of depreciation and the fair value of the machine on July 1 2019 was $300,000. Cancer Ltd. year end is June 30. Additionally, its incremental borrowing rate is 10%. Aquarius implicit rate is 12 % which is known to Cancer Ltd. Requirements:

a) State why this should be classified as a finance lease (1.25 marks) 

b) Prepare the lease schedule. (8.25 marks) Use online TVM financial calculator .

c) Prepare the necessary journal entries for July 1 2019 and June 30 2020 (5.5 marks)

Answer rating: 100% (QA)

a This lease should be classified as a finance lease because it meets the criteria of transfer of ownership bargain purchase option and lease term The lease term is for 8 years which is more than 75 o... View the full answer